MISCELLANEOUS REVENUE ISSUES
Y 4. W 36: 103-64
ffiscellaneous Revenue Issues> Seria...
HEARINGS
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE MEASURES
OF THE
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRD CONGRESS
FIRST SESSION
JUNE 17, 22, 24; JULY 13, 1993; AND SEPTEMBER 8, 21, 23, 1993
PART 2 OF 3
SEPTEMBER 8, 21, AND 23, 1993
Serial 103-64
Printed for the use of the Committee on Ways and Means
oppoftrmov
JUL2 0t99*
BOSTONeobaGUttHAF
MISCEIiANEOUS REVENUE ISSUES
HEARINGS
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE MEASURES
OF THE
COMMITTEE ON WAYS AND MEANS
HOUSE OP REPRESENTATIVES
ONE HUNDRED THIRD CONGRESS
FIRST SESSION
JUNE 17, 22, 24; JULY 13, 1993; AND SEPTEMBER 8, 21, 23, 1993
PART 2 OF 3
SEPTEMBER 8, 21, AND 23, 1993
Serial 103-64
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1994
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-04A369-5
COMMITTEE ON WAYS AND MEANS
DAN ROSTENKOWSKI, IllinoiB. Chairman
SAM M. GIBBONS, Florida
JJ. PICKLE, Texas
CHARLES B. RANGEL, New York
FORTNEY PETE STARK, California
ANDY JACOBS, Jk., Indiana
HAROLD E. FORD, Tennessee
ROBERT T. MATSUI. California
BARBARA B. KENNELLY, Connecticut
WILLIAM J. COYNE, Pennsylvania
MICHAEL A. ANDREWS. Texas
SANDER M. LEVIN, Michigan
BENJAMIN L. CARDIN, Maryland
JIM MCDERMOTT, Washington
GERALD D. KLECZKA, Wisconsin
JOHN LEWIS, Georgia
L.F. PAYNE, Virginia
RICHARD E. NEAL, Massachusetts
PETER HOAGLAND, Nebraska
MICHAEL R. MCNULTY, New York
MIKE KOPETSKI, Oregon
WILLIAM J. JEFFERSON, Louisiana
BILL K. BREWSTER, Oklahoma
MEL REYNOLDS, Illinois
BILL ARCHER, Texas
PHILIP M. CRANE, Illinois
BILL THOMAS, California
E. CLAY SHAW, JR., Florida
DON SUNDQUIST, Tennessee
NANCY L. JOHNSON, Connecticut
JIM BUNNING, Kentucky
FRED GRANDY, Iowa
AMO HOUGHTON, New York
WALLY HERGER, California
JIM McCRERY, Louisiana
MEL HANCOCK, Missouri
RICK SANTORUM, Pennsylvania
DAVE CAMP, Michigan
Janice Mays, Chief Counsel and Staff Director
ChaRL£S M. Brain, Assistant Staff Director
PHILUP D. Moseley, Minority Chief of Staff
Subcommittee on Select Revenue Measures
CHARLES B. RANGEL, New York, Chairman
L.F. PAYNE, Virginia MEL HANCOCK, Missouri
RICHARD E. NEAL, Massachusetts DON SUNDQUIST,
PETER HOAGLAND, Nebraska JIM McCRERY, Louisiana
MICHAEL R. McNULTY, New York DAVE CAMP, Michigan
MIKE KOPETSKI, Oregon
ANDY JACOBS. Jr.. Indiana
(ID
CONTENTS
Page
Part 1 (June 17, 22, 24; and July 13, 1993) 1
Part 2 (September 8, 21, and 23, 1993) 1055
Part 3 (Submissions for the Record — Revenue losers and revenue
raisers) 1787
Press releases announcing the hearings 2
WITNESSES
U.S. Department of the Treasury, Hon. Leslie B. Samuels, Assistant
Secretary for Tax Policy:
June 22, 1993 299
September 21, 1993 1397
U.S. Department of Commerce, Diana H. Josephson, Deputy Under Secretary
for Oceans and Atmosphere, National Oceanic and Atmospheric Adminis-
tration 353
U.S. (General Accounting Office, Natwar M. Gandhi, Associate Director, Tax
Policy and Administration Issues, General Government Division, Tom
Short, Assignment Manager, and David Pasquarello, Evaluator, Philadel-
phia GAO 1421
Abrahamson, (Jen. James A., Oracle Corp., and FSC Software Coalition 638
Actors' Equity Association, Ron Silver and Mark J. Weinstein 1121
Ad Hoc Group to Preserve Deduction for Advertising, Mark McConaghy 1171
Advanced Micro Devices, Cliff Jemigan 265
Advertising Tax Coalition
Timothy White 1179
Dewitt F. Helm, Jr 1184
Aerospace Industries Association, Douglas C. McPherson 668
Aerospace States Association (see listing for Hon. C. Michael Callihan)
Air Transport Association of America, Edward A. Merlis 1303
Alfers, Stephen D., Mineral Resources Alliance 1265
Alliance for Collaborative Research, Larry W. Sumney 371
Alliance for Responsible CFC Policy, Kevin J. Fay 1709
Alliance of American Insurers, Robert Jarratt 1488
Alliance to Save Energy, Mary Beth Zimmerman 699
Allis, John E., Houston, Tex 1536
American Agriculture Movement, Inc., Harvey Joe Sanner 1740
American Bankers Association, Taxation Committee, Lynda A. Kern 192
American Bar Association, Section of Taxation, Committee on S Corporations,
Jordan P. Rose 434
American Express Travel Related Services, Co., Richard P. Romeo 1153
American Farmland Trust, Edward Thompson, Jr 801
American Federation of Television & Radio Artists, Ron Silver and Mark
Weinstein 1121
American Financial Services Association, Richard P. Romeo 1153
American Football Coaches Association, Charles McClendon 91
American Institute of Certified Public Accountants:
Gerald W. Padwe 466
Pamela J. Pecarich 1454
American Insurance Association, Robert Rahn 1500
(III)
IV
Page
American Iron Ore Association, John L. Kelly 1275
American Land Title Association, Irving Morgenroth 1037
American Nuclear Insurers, Robert Rahn 1500
American Public Power Association, Stephen F. Johnson 770
American Society of Association Executives, Susan Bitter Smith 1335
American Vintners Association, Herbert Schmidt 141
American Wind Energy Association, Michael L. Marvin 756
AmSouth Bank N.A., Lynda A. Kern 192
Aponte, Angelo J., National Council of State Housing Agencies, and New
York State Division of Housing and Community Renewal 876
Arizona Cable Television Association, Susan Bitter Smith 1335
Amdt, Aurel M., National League of Cities, et al; and Lehigh County
Authority 979
Associated Builders & Contractors, Inc.:
Robert Permison and Bernard Leibtag 427
Don Owen 1547
Associated General Contractors of America, Robert J. Desjardins
July 13, 1993 1030
September 21, 1993 1553
Association of American Railroads, Edwin L. Harner 514
Association of Christian Schools International, Jonn C. Holmes 1082
Association of Independent Colleges of Art and Design, Fred Lazarus IV 1103
Association of Local Housing Finance Agencies, Stephen G. Leeper 887
Association of National Advertisers, Inc., Dewitt F. Helm, Jr 1184
Bacchus, Hon. Jim, a Representative in Congress from the State of Florida .... 989
Baptist Foundation of Oklahoma, James H. Lockhart 1768
Barlow, Hon. Thomas J. Ill, a Representative in Congress from the State
of Kentucky 1598
Bartsch, Charles, Northeast Midwest Institute 840
Battle Fowler Uw Offices, Richard L. OToole 227
Beard, E. Lee, Business Women's GolPLink, and First Federal Savings 1325
Bechtel Construction Co., Michael E. Martello 1043
Berman, Hon. Howard L., a Representative in Congress from the State of
California 100
Bloch, Robert A., Gordonsville, Va 794
Borton, Pamela K., Council for Rural Housing and Development, and
Southwind Management Company 902
Bouldin, Kenneth A., CDLA Computer Leasing & Remarketing Association .... 272
Bretagne Corp., Virginia Lazenby:
June 24, 1993 691
September 8, 1993 1242
Bristol Savings Bank of Connecticut, Edward P. Lorenson 562
Brooklyn Union Gas Co., Fred J. Gentile 1632
Bryn Awel Corp., Gerald J. Herr 1558
Buford, Shamia "Tab," City National Bank of Newark 233
Building Owners & Managers Association International:
James C. Dinegar 1738
Thomas B. McChesney 254
Bunning, Hon. Jim, a Representative in Congress from the State of Kentucky 1595
Business Women's GolPLink, E. Lee Beard 1325
Cahan, Cora, New 42nd Street, Inc 361
California Association of Winegrape Growers, Robert P. Hartzell 1648
California Carrot Board, John Guerard 1662
California League of Savings Institutions, Henry W. Schmidt, Jr 1309
California Pistachio Commission, Joseph C. Macllvarne 1655
California Water Service Co., Donald L. Houck 132
Callihan, Hon. C. Michael, Lieutenant Governor of Colorado; and Aerospace
States Association, as presented by Hon. Joel Hefley, a Representative
in Congress from Colorado 865
Campbell, Robert H., Independent Refiners Coalition, and Sun Co., Inc 1229
Capon, Ross, Nationsd Association of Railroad Passengers 518
Carbonic Industries Corp., J. Vernon Hinely 1760
CDLA Computer Leasing & Remarketing Association, Kenneth A. Bouldin 272
Central State Life Insurance Co., Virginia Kirkland Shehee 158
Chemical Manufacturers Association, Thomas G. Singley 1472
Chicago Title & Trust Co., B. Wyckliffe Pattishall 1673
Chicago, City of, Hon. Richard M. Daley, Mayor 830
V
Page
Cianbro Corp., Robert J. Desjardins:
July 13, 1993 1030
September 21, 1993 1553
City National Bank of Newark, Shamia 'Tab" Buford 233
Cleveland-Cliffs, Inc., John L. Kelly 1275
Coalition for Asset Backed Securities, Donald B. Susswein 214
Coalition for the Fair Treatment of Environmental Cleanup Costs, Wajrne
Robinson 1626
Coalition on Energy Taxes, R. David Damron 1254
Coalition to Elinunate Tax Barriers to Environmental Cleanup, Fred J.
Gentile 1632
Coalition to Preserve the Current Deductibility of Environmental Remedi-
ation Costs, Roy E. Hock 1604
Cohber Press, Inc., Howard C. Webber, Jr 1209
Cohen, Sheldon S., Leadership Council on Advertising Issues 1192
Colorado, State of (see listing for Hon. C. Michael Callihan)
Commercial Finance Association, Louis Eliasberg, Jr 201
Conmiittee for Competition Through Advertising, Gerald Z. Gibian 1164
Community Bankers Association of Illinois, David E. Manning 208
Computer & Business Equipment Manufacturers Association, Robert
Mattson 645
Conference of Chief Justices, and Conference of State Court Administrators,
Hon. Thomas R. Phillips, Chief Justice 71
Construction Financial Management Association, Gerald J. Herr 1558
Contos, Larry, National Grocers Association, and Pay Less Supermarkets,
Inc 523
Coopers & Lybrand, Ronald T. Maheu 1754
Comeel, Frederic G., Sullivan & Worcester 479
Costello, Hon. Jerry F., a Representative in Congress from the State of
Illinois 64
Council for Rural Housing and Development, Pamela K. Borton 902
Cox, Dale, Independent Bakers Association 1094
Crispin, Robert W., Travelers Corp 180
Crop Protection Coalition, Richard Douglas 1745
Dakin, William G., National Association of Manufacturers, and Mobil Corp .... 1431
Daley, Hon. Richard M., Mayor, City of Chicago 830
Damron, R. David, Petrochemical Energy Group, Coalition on Energy Taxes,
and Hoechst Celanese Corp 1254
DeFazio, Hon. Peter A., a Representative in Congress from the State of
Oregon 59
Desjardins, Robert J., Associated General Contractors of America, and
Cianbro Corp.:
July 13, 1993 1030
September 21, 1993 1553
Destec Energy, Inc., Tom Remar 677
Dinegar, James C, Building Owners & Managers Association International ... 1738
Disabled American Veterans, John F. Heilman 120
Douglas, Richard, Crop Protection Coalition, and Sun-Diamond Growers of
California 1745
Dyer, Randy (see listing for National Structured Settlement Trade Associa-
tion)
Education Finance Council, Lawrence W. OToole 1136
Ege, Karl J., Frank Russell Co. and Frank Russell Investment Management
Co 593
Electronic Industries Association, Peter F. McCloskey:
July 13, 1993 622
September 21, 1993 1464
Eliasberg, Louis, Jr., Commercial Finance Association, and Finance Company
of America 201
Elliott, Gary, National Wood Energy Association 751
Emergency Committee for American Trade, Raymond J. Wiacek 1528
Emil Buehler Perpetual Trust, Ira J. Kaltman 420
Erlandson, Dawn, Friends of the Earth 1294
Estee Lauder Co., Gerald Z. Gibian 1164
Farren, Michael J., Xerox Corp 631
Fay, Kevin J., Alliance for Responsible CFC Policy 1709
Feeney, David L., National Retail Federation, and R.H. Macy & Co., Inc 1203
VI
Page
Feulner, Edwin J., Jr. {see listing for Heritage Foundation)
Finance Company of America, Louis Eliasberg, Jr 201
Fink, Matthew P., Investment Company Institute 572
Firemen's Association of the State of New York, Kenneth E. Newton ..!!".***...il 105
First Colony Life Insurance Co., Andrew Larsen 174
First Federal Savings, E. Lee Beard 1325
Florida Clinical Practice Association, Inc., Stanley W. Rosenkranz ................." 1106
Florida Farm Bureau Casualty Insurance Co., Robert Jarratt 1488
Florida Farm Bureau General Insurance Co., Robert Jarratt .....". 1488
Forest Industries Council on Taxation, Bartow S. Shaw, Jr 682
Frank Russell Co., and Frank Russell Investment Management Co., Karl
J. Ege, and Warren Thompson 593
Friends of the Earth, Dawn Erlandson 1284
FSC Software Coalition, Gen. James A. Abrahamson 638
Gackenbach, Julie Leigh, U.S. Chamber of Commerce I444
GenCorp, Wayne Robinson 1626
General Dynamics Corp., Douglas C. McPherson 668
General Motors Corp., G. Mustafa Mohatarem 262
Gentile, Fred J., Coalition to Eliminate Tax Barriers to Environmental Clean-
up, and Brooklyn Union Gas Co 1632
Gentile, Peter A., North American Reinsurance Corp 1480
Geothermal Resources Association, Thomas C. Hinnchs 766
Gibian, Gerald Z., Estee Lauder Co., and Committee for Competition Through
Advertising 1164
Gill, Charles B., National Rural Utilities Cooperative Finance Corp 1346
Girard, William C. "Chris," National Association of Convenience Stores, and
Plaid Pantries 538
Glunt, Roger C, (see listing for National Association of Home Builders)
Golden State Mutual Life Insurance Co., Laricin Teasley 187
Graphic Arts Legislative Council, Howard C. Webber, Jr 1209
Great Western Financial Corp., Michael Palko (see listing for Savings &
Community Bankers of America)
Green, Robert H., National Foreign Trade Council, Inc 1507
Gregg. Robert S., Sequent Computer Systems, Inc 389
GrilTm, James T., John D. and Catherine T. MacArthur Foundation 402
Grubb & Ellis Co., Thomas B. McChesney 254
Guerard, John, California Carrot Board, and Wm. Bolthouse Farms, Inc 1662
Hamrick, Stephen H., Investment Program Association, and PaineWebber
Inc 496
Harman, Hon. Jane, a Representative in Congress from the State of Califor-
nia 1073
Harper, Edwin L., Association of American Railroads 514
Hartzell, Robert P., California Association of Winegrape Growers 1648
Hecht, Marjorie Mazel, 21st Century Science & Technology 1730
Hefley, Hon. Joel, a Representative in Congress from the State of Colorado
(see listing for Hon. C. Michael Callihan)
Heilman, John F., Disabled American Veterans 120
Helm, Dewitt F., Jr., Advertising Tax Coalition, and Association of National
Advertisers, Inc 1184'
Henderson, Robert E., South Carolina Research Authority 973
Heritage Foundation, William J. Lehrfeld (on behalf of Edwin J. FauLaer,
Jr.) 1331
Herr, Gerald J., Construction Financial Management Association, and Bryn
Awel Corp 1558
Hinely, J. Vernon, Carbonic Industries Corp 1760
Hinrichs, Thomais C, Geothermal Resources Association, and Magma Power
Co 766
Hock, Rov E., Coalition to Preserve Deductibility of Environmental Remedi-
ation Costs, and Technitrol, Inc 1604
Hoechst Celanese Corp., R. David Damron 1254
Holmes, John C, Association of Christian Schools International 1082
Home Health Services and Stafiing Association, James C. Pyles 1574
Hood, John A., National Assisted Management Association, and Volunteers
of America 940
Horn, Hon. Stephen, a Representative in Congress from the State of Califor-
nia 1074
Houck, Donedd L., National Association of Water Cos., and California Water
Service Co 132
VII
Page
Housing, Urban Redevelopment Authority of Pittsburgh, Stephen G. Leeper ... 887
Hughes, Vester T., Jr., Hughes & Luce 126
Hyman, Morton P., International Shipholding Corp.; Overseas Shipholding
Group, Inc.; and OMI Corp 660
IBM Corp., Robert Mattson 645
Independent Bakers Association, Dale Cox 1094
Independent Petroleum Association of America, Vii^nia Lazenby:
June 24, 1993 691
September 8, 1993 1242
Independent Refiners Coalition, Robert H. Campbell 1229
International Shipholding Corp., Morton P. Hyman 660
Investment Company Institute, Matthew P. Fink 572
Investment Program Association, Stephen H. Hamrick, and Bruce H. Vincent 496
IRECO IncTDyno Nobel Inc., David G. Millett 527
Itel Corp., James E. Knox 585
Izaak Walton League of America, Maitland Sharpe 798
Jarratt, Robert, National Association of Independent Insurers, Alliance of
American Insurers, National Association of Mutual Insurance Companies,
Florida Farm Bureau Casualty Insurance Co., and Florida Farm Bureau
General Insurance Co 1488
Jefferson, Hon. William J., a Representative in Congress from the State
of Louisiana 58
Jemigan, ClifF, Semiconductor Industry Association, and Advanced Micro
Devices 265
John D. and Catherine T. MacArthur Foundation, James T. Griffin 402
Johnson, Hon. Nancy L., a Representative in Congress from the State of
Connecticut 41
Johnson, Stephen F., American Public Power Association, and Washington
Public Utility Districts' Association 770
Joseph, Rachel A., National Congress of American Indians 557
Jung, Paul, Student Loan Interest Deduction Restoration Coalition 1016
Kabsh, Mark, National Association of Home Builders 1436
Kaltman, Ira J., Emil Buehler Perpetual Trust 420
Kaman Corp., Glenn M. Messemer 277
Kelly, John L., American Iron Ore Association and Cleveland-ClifTs, Inc 1275
Kern, Lynda A., American Bankers Association, Taxation Committee; and
AmSouth Bank N.A 192
Kies, Kenneth J., North American Reinsurance Corp 1480
Kilpatrick Life Insurance Co., Virginia Kilpatrick Shehee 158
Kleczka, Hon. Gerald D., a Representative in Congress from the State of
Wisconsin 1372
Kmart Corp., James P. Sheridan 258
Knox, James E., Itel Corp 585
Land Insurance Title Co., Irving Morgenroth 1037
Lange, Robert T., Malvern, Pa 811
Larsen, Andrew, National Structured Settlement Trade Association, and First
Colony Life Insurance Co 174
Lazarus, Fred, FV, Association of Independent Colleges of Art and Design 1103
Lazenbv, Virginia:
Independent Petroleum Association of America, and Bretagne Corp 691
Independent Petroleum Association of America, Bretagne Corp., and
National Stripper Well Association 1242
Leadership Council on Advertising Issues, Sheldon S. Cohen 1192
Lee, John W., College of William and Mary, Marshall-Wythe School of Law .... 1687
Leeper, Stephen G., Association of Local Housing Finance Agencies; and
Housing, Urban Redevelopment Authority of Pittsburgh 887
Lehigh County Authority, Aurel M. Amdt 979
Lehman Brothers, Inc., K. Fenn Putnam 954
Lehrfeld, William J., Heritage Foundation 1331
Leibtag, Bernard, Associated Builders & Contractors, Inc 427
Levin, Hon. Sander M., a Representative in Congress from the State of
Michigan 30
Levine, Howard J., Roberts &. Holland 1680
Lewis, Terry, National Association of Housing Cooperatives 947
Lockhart, James H., Baptist Foundation of Oklahoma 1768
Longsworth, Nellie L., Preservation Action 929
Lorenson, Edward P., Savings & Community Bankers of America, and Bristol
Savings Bank of Connecticut 562
VIII
Page
Louisiana Insurers' Conference, Virginia Kilpatrick Shehee 158
Lovain, Timothy, Trade Taxes Group 507
Macllvaine, Joseph C, Western Growers Association, Western Pistachio Asso-
ciation, California Pistachio Commission, and Paramount Farming Co 1655
MAERP Reinsurance Association, Robert Rahn 1500
Magill, James N., Veterans of Foreign Wars of the United States 123
Magma Power Co., Thomas C. Hinrichs 766
Maheu, Ronald T., Coopers & Lybrand 1754
Mangis, Jon A., Oregon Department of Veterans' Affairs , 990
Manning, David E., Community Bankers Association of Illinois 208
Martell, James G., Prime Group, Inc 838
Martello, Michael E., National Constructors Association, and Bechtel Con-
struction Co 1043
Marvin, Michael L., American Wind Energy Association 756
Mattson, Robert, Computer & Business Equipment Manufacturers Associa-
tion, and IBM Cons 645
Mayer, Matthew, Times Square Center Associates, and Park Tower Realty
Corp 362
McChesney, Thomas B., Building Owners & Managers Association Inter-
national, and Grubb & Ellis Co 254
McClendon, Charles, American Football Coaches Association 91
McCloskey, Peter F., Electronic Industries Association:
June 24, 1993 622
September 21, 1993 1464
McConaghy, Mark, Ad Hoc Group to Preserve Deduction for Advertising 1171
McPherson, Douglas C, Aerospace Industries Association, and General
Dynamics Corp 668
Merlis, Edward, Air Transport Association of America 1303
Merrill Lynch & Co., Inc., LaBrenda Garrett Stodghill 580
Merrill, Peter, U.S. Multinational Corporation Tax Policy Coalition 1516
Messemer, Glenn M., Kaman Corp 277
Metzger, Philip C, New York State Office of Federal Affairs 788
Michigan State Hospital Finance Authority, and Michigan Higher Education
Facilities Authority, Roy A. Pentilla 966
Millett, David G., IRECO Inc/Dyno Nobel Inc 527
Mineral Resources Alliance, Stephen D. Alfers 1265
Mobil Corp., William G. Dakin 1431
Mohatarem, G. Mustafa, General Motors Corp 262
Montgomery, Hon. G.V. (Sonny), Chairman, Committee on Veterans' Affairs,
anda Representative in Congress from the State of Mississippi 46
Morgenroth, Irving, American Land Title Association, and Land Insurance
Title Co 1037
Mutual Atomic Energy Liability Underwriters, Robert Rahn
National Assisted Management Association, John A. Hood 940
National Association of Computer Consultant Businesses, Harvey J.
Shulman 110
National Association of Convenience Stores, William C. "Chris" Girard 538
National Association of Home Builders:
J. Leon Peace, Jr. (on behalf of Roger C. Glunt) 893
Mark Kalish (on behalf of Thomas N. Thompson) 1436
National Association of Housing Cooperatives, Terry Lewis 947
National Association of Independent Insurers, Robert Jarratt 1488
National Association of Manufacturers, William G. Dakin 1431
National Association of Mutual Insurance Cos., Robert Jarratt 1488
National Association of Railroad Passengers, Ross Capon 518
National Association of Water Cos., Donald L. Houck 132
National Congress of American Indians, Rachel A. Joseph 557
National Constructors Association, Michael E. Martello 1043
National Council of Health Facilities Finance Authorities, Roy A. Pentilla 966
National Council of State Housing Agencies, Angelo J. Aponte 876
National Foreign Trade Council, Inc., Robert H. Green 1507
National Grocers Association, Larry Contos 523
National Insurance Association, Laricin Teasley 187
National League of Cities, et al, Aurel M. Amdt 979
National ResXtv Committee:
Stefan F. Tucker 1668
William C. Rudin 247
IX
Page
National Retail Federation:
David L. Feeney 1203
James P. Sheridan 258
National Rural Utilities Cooperative Finance Corp., Charles B. Gill 1346
National Staff Network, Marvin R. Selter 100
National Stripper Well Association, Virginia Lsizenby 1242
National Structured Settlement Trade Association (Andrew Larsen on behalf
of Randy Dyer) 174
National Trust for Historic Preservation, Hany K. Schwartz 918
National Volunteer Fire Council, Kenneth E. Newton 105
National Wood Energy Association, Gary Elliott 751
Native American Affairs, Subcommittee on, Committee on Natural Resources,
Hon. Bill Richardson, Chairman, and a Representative in Congress from
the State of New Mexico 292
Navajo Nation, Faith R. Roessel 549
New 42nd Street, Inc., Cora Cahan 361
New England Education Loan Marketing Corp., Lawrence W. OToole 1136
New York State Division of Housing and Community Renewal, Angelo J.
Aponte 876
New York State oflice of Federal Affairs, Philip C. Metzger 788
Newspaper Association of America, Timothy White 1179
Newton, Kenneth E., Firemen's Association of the State of New York, and
National Volunteer Fire Council 105
North American Reinsurance Corp., Peter A. Gentile and Kenneth J. Kies 1480
Northeast Midwest Institute, Charles Bartsch 840
NPES The Association for Suppliers of Printing & Publishing Technologies,
Mark J. Nuzzaco 1215
Nurse Brokers and Contractors of America, Sally Sumner 1566
Nuzzaco, Mark J., NPES The Association for Suppliers of Printing & Publish-
ing Technologies 1215
O'Connor, Edward A., Jr., Spaceport Florida Authority 998
O'Connor, James E., Savings ana Community Bankers of America 1316
OToole, Lawrence W., New England Education Loan Marketing Corp., and
Education Finance Council 1136
OToole, Richard L., Battle Fowler Law Offices 227
OMI Corp., Morton P. Hyman 660
Ono, Rutn M., Queen Emma Foundation 414
Oracle Corp., Gen. James A. Abrahamson 638
Oregon Department of Veterans' Affairs, Jon A. Mangis 990
Overseas Shipholding Group, Inc., Morton P. Hyman 660
Owen, Don Associated Builders & Contractors, Inc., and P&P Contractors 1547
P&P Contractors, Don Owen 1547
Padwe, Gerald W., American Institute of Certified Public Accountants 466
PaineWebber Inc., Stephen H. Hamrick 496
Palko, Michael, Great Western Financial Corp. (see listing for Savings &
Community Bankers of America)
Paramount Farming Co., Joseph C. Macllvaine 1655
Park Tower Realty Corp., Matthew Mayer 362
Pattishall, B. Wyckliffe, Chicaeo Title & Trust Co 1673
Pay Less Supermarkets, Inc., Larry Contos 523
Peace, J. Leon, Jr., National Association of Home Builders (see listing for
Roger C. Glunt)
Pecarich, Pamela J., American Institute of Certified Public Accountants 1454
Pennell, Jeffrey N., Emory University School of Law 1776
Pentilla, Roy A., National Council of Health Facilities Finance Authorities,
Michigan State Hospital Finance Authority, and Michigan Higher Edu-
cation Facilities Authority 966
Permison, Robert, Associated Builders & Contractors, Inc 427
Petrochemical Energy Group, R. David Damron 1254
PHH Corp., Samuel H. Wright 1089
Phillips, Hon. Thomas R., Chief Justice, Supreme Court of Texas; Joint Task
Force on Judicial Pension Plans; Conference of Chief Justices; and Con-
ference of State Court Administrators 71
Plaid Pantries, WilUam C. "Chris" Girard 538
PPG Industries, Inc., Donna Lee Walker 154
Preservation Action, Nellie L. Longsworth 929
Prime Group, Inc., James G. Martell 838
Printing Industries of America, Howard C. Webber, Jr 1209
X
Page
Public Securities Association, R. Fenn Putman, and Lehman Brothers, Inc 954
Pyles, James C, Home Health Services and Stafllng Association 1574
Queen Enama Foundation, Ruth M. Ono 414
R.H. Macy & Co., Inc., David L. Feeney 1203
R.R. Donnelley & Sons Co., Frank Uvena 1148
Rahn, Robert, American Nuclear Insurers, American Insurance Association,
Mutual Atomic Energy Liability Underwriters, and MAERP Reinsurance
Association 1500
Ray, Cecil A., Jr., State Bar of Texas, Section of Taxation 814
Remar, Tom, WMX Technology & Services; Teco Energy, Inc., and Destec
Energy, Inc 677
Renewable Fuels Association, Eric Vaughn 741
Reynolds, Hon. Mel, a Representative in Congress from the State of Dlinois .... 857
Richardson, Hon. Bill, Chairman, Subcommittee on Native American Affairs,
Committee on Natural Resources, and a Representative in Congress from
the State of New Mexico 292
Robert Mondavi Winery, Herbert Schmidt 141
Robinson, Wayne, CoaUtion for the Fair Treatment of Environmental Cleanup
Costs 1626
Roessel, Faith R., Navajo Nation 549
Romeo, Richard P., American Financial Services Association, and American
Express Travel Related Services Co 1153
Rose, Jordan P., American Bar Association, Section of Tjixation, Committee
on S Corporations 434
Rosenkranz, Stanley W., Florida Clinical Practice Association, UniversiW of
Florida Agency Funds, and University of South Florida College of Medi-
cine's Faculty Practice Plan 1106
Roybal-AUard, Hon. Lucille, a Representative in Congress from the State
of California 1072
Rudin, William C, National Realty Committee, and Rudin Management Co ... 247
Sanner, Harvey Joe, American Agriculture Movement, Inc 1740
Savings & Community Bankers of America:
Edward P. Lorenson 562
James E. O'Connor (on behalf of Michael Palko) 1316
Schmidt, Henry W., Jr. California League of Savings Institutions 1309
Schmidt, Herbert, American Vintners Association, and Robert Mondavi
Winery 141
Schumer, Hon. Charles E., a Representative in Congress from the State
of New York 859
Schwartz, Harry K., National Trust for Historic Preservation 918
Screen Actors Guild, Ron Silver, and Mark Weinstein 1121
Selter, Marvin R., National Staff Network 100
Semiconductor Industry Association, Cliff Jemigan 265
Semiconductor Research Corp., Larry W. Sumney 371
Sequent Computer Systems, Inc., Robert S. Greg^ 389
Sharpe, Maitland, Izaak Walton League of America 798
Shaw, Bartow S., Forest Industries Council on Taxation 682
Shaw, Hon. E. Clay, Jr., a Representative in Congress from the State of
Florida 35
Shehee, Virginia Kilpatrick, Louisiana Insurers' Conference, Kilpatrick Life
Insurance, and Central State Life Insurance Co 158
SheU Oil Co., Thomas G. Singley 1472
Sheridan, James P., National Retail Federation, and Kmart Corp 258
Shulman, Harvey J., National Association of Computer Consultant
Businesses 110
Silver, Ron, Actors' Equity Association, and Screen Actors Guild, and Amer-
ican Federation of Television & Radio Artists 1121
Singley, Thomas G., Chemical Manufacturers Association and Shell Oil Co 1472
Sklar, Scott, Solar Energy Industries Association 706
Smith, Anthony L., Southern California Edison Co., et al 733
Smith, Donald David, Western Commercial Space Center 1005
Smith, Hon. Nick, a Representative in Congress from the State of Michigan ... 82
Smith, Susan Bitter, Arizona Cable Television Association, and American
Society of Association Executives 1335
Solar Energy Industries Association, Scott Sklar 706
Solomon, Michael F., Irvins, Phillips & Barker 1614
South Carolina Research Authority, Robert E. Henderson 973
Southern California Edison Co., et al, Anthony L. Smith 733
XI
Page
Southwind Management Company, Pamela K. Borton 902
Spaceport Florida Authority, Edward A. O'Connor, Jr 998
Stodffhill, LaBrenda Garrett, Merrill Lynch & Co., Inc 580
Strickland, Hon. Ted, a Representative in Congress from the State of Ohio 871
Studds, Hon. Gerry E., a Representative in Congress from the State of
Massachusetts 49
Student Loan Interest Deduction Restoration Coalition, Paul Jung 1016
Sullivan & Worcester, Frederic G. Comeel 479
Sumner, Sally, Nurse Brokers and Contractors of America 1566
Sunmey, Larry W., Alliance for Collaborative Research, and Semiconductor
Research Corp 371
Sun Co., Inc., Robert H. Campbell 1129
Sun-Diamond Growers of California, Richard Doiiglas 1745
Susswein, Donald B., Coalition for Asset Backed &curitie8 214
Swift Energy Co., Bruce H. Vincent 496
Teasley, Larkin, National Insurance Association, and Golden State Mutual
Life Insurance Co 187
Technitrol, Inc., Roy E. Hock 1604
Teco Energy, Inc., Tom Remar 677
Texas, State Bar of. Section of Taxation, Cecil A. Ray, Jr 814
Texas, Supreme Court of, Hon. Thomas R. Phillips, Chief Justice 71
Thompson, Edward, Jr., American Farmland Trust 801
Thompson, Thomas N. (see listing for National Association of Home Builders)
Thompson, Warren, Frank Russell Co., and Frank Russell Investment Man-
agement Co 593
Times Square Center Associates, Matthew Mayer and Dale W. Wickham 362
Times Union, Timothy White 1179
Torricelli, Hon. Robert G., a Representative in Congress from the State of
New Jersey 52
Trade Taxes Group, Timothy Lovain 507
Travelers Corp., Robert W. Crispin 180
Tucker, Hon. Walter R. Ill, a Representative in Congress from the State
of California 1057
Tucker, Stefan F., National Realty Committee 1668
Twenty-First (21st) Century Science & Technology, Marjorie Mazel Hecht 1730
U.S. Chamber of Commerce, Julie Leigh Gackenbach 1444
U.S. Multinational Corporation Tax Policy Coalition, Peter Merrill 1516
Uvena, Frank, R.R. Donnelley & Sons Co 1148
Vaughn, Eric, Renewable Fuels Association 741
Veterans of Foreign Wars of the United States, James N. Magill 123
Veterans' AfTaris, Committee, Hon. G.V. (Sonny) Montgomery, and a Rep-
resentative in Congress from the State of Mississippi 46
Vincent, Bruce H., Investment Program Association, and Swift Enei^ Co 496
Volunteers of America, John A. Hood 940
Walker, Donna Lee, PPG Industries, Inc 154
Washington Public Utility Districts' Association, Stephen F. Johnson 770
Waters, Hon. Maxine, a Representative in Congress from the State of Califor-
nia 1075
Webber, Howard C, Jr., Printing Industries of America, Graphic Arts Legisla-
tive Council, and Cohber Press, Inc 1209
Weinstein, Mark J., Screen Actors Guild, American Federation of Television
and Radio Artists, Actors' Equity Association 1121
Western Commercial Space Center, Donald David Smith 1005
Western Growers Association, Joseph C. MacFlvaine 1655
Western Pistachio Association, Joseph C. Macllvaine 1655
Wheat, Hon. Alan, a Representative in Congress from the State of Missouri ... 1384
White, Timothy, Times Union, Advertising Tax Coalition, and Newspaper
Association of America 1179
Wiacek, Raymond J., Emergency Committee for American Trade 1528
Wickham, Dale W., Times Square Center Associates 362
Wm. Bolthouse Farms, Inc., John Guerard 1662
WMX Technology & Services, Tom Remar 677
Wright, Samuel H., PHH Corp 1089
Xerox Corp., Michael J. Farren 631
Zimmerman, Mary Beth, Alliance to Save Energy 699
SUBMISSIONS FOR THE RECORD
Listing by Subject— Revenue Losers
tax accounting
National Association of Regulatory Utility Commissioners, Linda Bisson Ste-
vens, letter and attachments 1787
FINANCIAL INSTITUTIONS
Associated Bank, NA, Neenah, Wis., Michael B. Mahlik, letter 1792
Bank Securities Association, statement 1793
Bank South, N.A., Atlanta, Ga., J. Blake Young, Jr., letter 1796
Bamett Banks Trust Co., N.A., Jacksonville, Fla., Michael C. Baker, letter 1797
Commerce Bancshares, Inc., Kansas City, Mo., John S. Archer, letter 1798
First Fidelity Bank, NA., Newark, New Jersey, John J. Phillips, letter 1799
First National Bank of Chicago, Michael P. Traba, statement 1801
First Source Bank, South Bend, Ind., James P. Coleman, letter 1804
First Trust National Association, St. Paul, Minn., John M. Murphy, Jr.,
letter 1805
Hawaiian Trust Co., Ltd., Honolulu, Hawaii, Douglas Philpotts, letter 1807
Independent Bankers Association of America, James R. LaufTer, statement 1809
Investment Co. Institute, statement (see listing under Multiple Issues head-
ing)
KPMG Peat Marwick, New York, N.Y., Kathy L. Anderson, letter 1811
Magna Trust Co., Belleville, 111., Peter C. Merzian, letter 1812
Meridian Asset Management, Inc., Valley Forge, Pa., Robert C. Williams,
letter 1813
Midlantic National Bank, Edison, NJ., AJ. DiMatties, letter 1814
Northern Trust Co., Chicago, 111., Bany G. Hastings, letter 1815
Old Kent Bank and Trust Co., Grand Rapids, Mich., E. Philip Farley, letter ... 1816
Savings Bank Life Insurance Co., Wobum, Mass., Robert K. Sheridan, state-
ment 1820
Securities Industry Association, Marc E. Lackritz, statement 1823
Security Trust Co., NA., Baltimore, Md., Timothy J. Hynes III, letter 1817
Texas Commerce Investment Co., Houston, Tex.:
H. Mitchell Harper, letter 1818
William 0. Leszinske, letter 1819
INSURANCE
Association of Financial Guaranty Insurers, William A. Geoghegan, statement
and attachments 1837
Canadian Life and Health Insurance Association, Raymond L. Britt, Jr.,
and Mary V. Harcar, statement 1826
Colonial Life & Accident Insurance Co., Inc., Columbia, S.C, statement and
attachment 1844
Mutual of America, Daniel W. Coyne, letter 1836
PASS-THROUGH ENTITIES
Alcoma Association, Inc., Lake Wales, Fla., Lawrence C. Updike, statement .... 1858
Arkansas Electric Cooperative Corp., Carl S. Whillock, letter 1870
Florida Bar, Tax Section, Jerald David August, statement 1849
Griflin Industries, Inc., Cold Spring, Ky., Dennis B. GrifTm, statement 1864
(XII)
XIII
Page
Investment Co. Institute, statement (see listing under Multiple Issues head-
ing)
National Rural Electric Cooperative Association, Bob Bergland, statement 1871
Schnitzer Investment Corp., Portland, Ore., Kenneth M. Novack, statement ... 1866
Solo Cup Co., statement 1859
Wells Manufacturing Co., statement 1862
COST RECOVERY
American Automobile Manufacturers Association, statement 1883
D'Agostino Supermarkets, Inc., Larchmont, N.Y., Nicholas D'Agostino, Jr.,
letter 1885
Delta Queen Steamboat Co., New Orleans, La., statement 1876
Kennelly, Hon. Barbara B., a Representative in Congress from the State
of Connecticut, statement (see listing under Multiple Issues heading)
National Association for the Self-Employed, Bennie L. Thayer, letter (see
listing under Multiple Issues heading)
New York Cruise Lines, Inc., August J. Ceradini, Jr., letter 1879
Passenger Vessel Association, Eric G. Scharf, letter 1880
Sayville Ferry, Sayville, N.Y., Ken Stein, Jr., letter 1882
EMPLOYEE BENEFITS
AlliedSignal Inc., Ronald A. Sinaikin, statement 1908
American Legion, Steve A. Robertson, statement 1887
Bedford Countv (Va.) Circuit Court, Hon. William W. Sweeney, letter (for-
warded by the Hon. L.F. Payne, a Representative in Congress from the
State of Virginia) 1896
Chrysler Corp., Robert G. Liberatore, statement and attachment 1902
Committee oi Annuity Insurers, statement and attachment 1898
CrisaUi, Donna M., Washington, D.C., statement 1889
ESOP Association:
Statement 1901
J. Michael Keeling, statement 1906
Illinois Supreme Court, Hon. Benjamin K. Miller, Chief Justice, letter and
attachment 1893
Investment Co. Institute, statement (see listing under Multiple Issues head-
ing)
Kansas City Royals Baseball, Michael E. Herman, statement 1385
Kennelly, Hon. Barbara B., a Representative in Congress from the State
of Connecticut, statement (see listing under Multiple Issues heading)
Non Commissioned Officers Association of the United States of America,
Larry D. Rhea and Michael Ouelette, statement 1913
PPG Industries, Inc., Raymond W. LeBoeuf, statement 1911
Rahall, Hon. Nick J., II, a Representative in Congress from the State of
West Virginia, statement 1890
Stump, Hon. Bob, a Representative in Congress from the State of Arizona,
letter and attachment 1892
iNDivrouAL
American Dental Association, statement and attachment 1926
American Society for Payroll Management, Robert D. Williamson, statement .. 1917
Associated Builders and Contractors, Inc., Charles E. Hawkins III, letter 1919
Building and Construction Trades Department, AFL-CIO, Robert A. Georgine,
statement 1921
Construction Financial Management Association, Joseph J. Lozano, state-
ment 1924
Johnson, Hon. Nancy L., a Representative in Congress from the State of
Connecticut, statement 851
MUitary Coalition, Paul W. Arcari and Michael Ouellette, letter 1929
ESTATE AND GIFT
American Farm Bureau Federation, statement 1957
Appalachian Mountain Club, Boston, Mass., Jennifer Melville, statement 1942
Appalachian Trail Conference, Harpers Ferry, W.Va., John Stokes and David
N. Startzell, statement 1943
Baptist Foundation of Oklahoma, James H. Lockhart, statement 1931
XIV
Page
Brandywine Conservancy, Chadda Ford, Pa., George A. Weymouth, state-
ment 1945
Brennan, Edward V., Gray, Caiy, Ames & Frye, La Jolla, Calif., statement
and attachments 1934
Brewster, Hon. Bill, a Representative in Congress from the State of Okla-
homa, statement 1932
Chesapeake Bay Foundation, Annapolis, Md., William C. Baker, letter 1946
Dutchess Land Conservancy, Stanfordville, N.Y., Ira Stem, statement 1947
Johnson, Hon. Nancy L., a Representative in Congress from the State of
Connecticut, statement 609
Land Trust Alliance, Jean W. Hocker, statement 1948
Oregon Trout, Inc., Portland, Ore., GeofF Pampush, letter 1950
Piatt, Ronald L., and Gregory F. Jenner, McDermott, Will & Emery, Washing-
ton, D.C., statement 1958
Save the Bay, Providence, R.I., Curt Spalding, letter 1951
South Carolina Coastal Conservation League, Charleston, S.C., Dana Beach,
statement 1952
Ward L. Quaal Co., Ward L. Quaal, statement 1954
Worthy, K. Martin, Hopkins & Sutter, Washington, D.C., statement 611
FOREIGN TAX PROVISIONS
American Petroleum Institute, statement 1961
Bell Atlantic Corp., statement and attachment 1965
Beneficial Corp., Gary J. Perkinson, statement 2012
BirdsaU, Inc., Riviera Beach, Fla., John H. Birdsall HI, letter and attach-
ments 1997
Cargill, Inc., Minneapolis, Minn., Bruce H. Bamett, statement and attach-
ments 2028
Caribbean Latin American Action, Peter Johnson, letter 2009
Chevron Corp.:
Statement 1985
Statement 2016
Chubb Corp., Warren, NJ., Dean R. OUare, statement 1970
Committee on State Taxation, Mark Cahoon, statement 2026
Emergency Committee for American Trade, Robert L. McNeill, letter 1975
Evans Economics, Inc., Washington, D.C., Michael K. Evans, letter 2006
Federal-Mogul Corp., Detroit, Mich., Robert C. Rozycki, statement 2019
Federation of American Controlled Shipping, Philip J. Loree, statement 1987
General Motors Corp., statement 2014
Information Tecnology Association of America, Luanne James, statement 1984
Matsui, Hon. Robert T., a Representative in Congress from the State of
California, statement 674
McClure, Trotter & Mentz, Chtd., Washington, D.C., William P. McClure,
statement 2023
National Foreign Trade Council, Inc., statement 1976
Shaw, Hon. E. Clay, Jr., a Representative in Congress from the State of
Florida, statement 1996
Tax Executives Institute, Inc., Robert H. Perlman, letter 1981
NATURAL RESOURCES
American Gas Association, statement 2062
American Methanol Institute, Raymond A. Lewis, statement 2069
American Public Power Association, Larry Hobart; National Rural Electric
Cooperative Association, Bob Bergland; and National Association of Regu-
latory Utility Commissioners, Thomas Choman, joint letter 2095
City Utilities of Springfield, Mo., Robert E. Roundtree, letter (forwarded
by the Hon. Mel Hancock, a Representative in Congress from the State
of Missouri) 2074
Columbia Gas Development Corp., Houston, Tex., Robert C. Williams, Jr.,
statement 2050
Delson Lumber Co., Hardel Mutual Plywood Corp., Manke Lumber Co., and
Conifer Pacific, joint statement 2034
Destec Energy, Inc., Houston, Tex., Charles F. Goff, statement 2040
Electric Transportation Coalition, Kateri A. Callahan, letter 2075
Independent Oil and Gas Association of West Virginia, Rich HefTelfinger,
statement 2044
XV
Page
Independent Petroleum Association of America, Roy W. Willis, letter 2080
Kenetech/U.S. Windpower, Robert T. Boyd, statement 2088
Large Public Power Council, and Salt River Project of Hioenix, Ariz., Mai^
BonsaU, statement 2085
Los Angeles, Calif., City of, statement 2083
Louisiana Land & Exploration Co., New Orleans, La., Leigjiton Steward,
statement 2054
Matsui, Hon. Robert T., a Representative in Congress from the State of
California, statement 730
MDU Resources Group, Inc., Bismarii, N.Dak., Robert E. Wood, statement 2057
Mitchell Energy & Development Corp., The Woodlands, Tex., Craig G. Good-
man, letter and attachment 2059
National Rural Electric Cooperative Association, Bob Bergland, statement 718
Natural Resources Defense Council, Marika Tatsutani, statement 2084
Northeast Public Power Association, Westborough, Mass., statement {see list-
ing under Multiple Issues heading)
Nortnwest Independent Forest Manufacturers, Tacoma, Wash., MJ. "Gus"
Kuehne, statement and attachment 2036
Sacramento, Calif., Municipal Utility District, statement 2096
Southern California Public Power Authority, Pasadena, CaUf., statement 2086
Tampa (Fla.) Electric Co., statement 2042
USX Corp., statement 2091
Washington Citizens for World Trade, Olympia, Wash., Nicholas J. Kirkmire,
statement 2093
Wise, Hon. Bob, a Representative in Congress from the State of West Vir-
ginia, letter and attachments 2045
HOUSING
Ford, Hon. Harold E., a Representative in Congress from the State of
Tennesses, statement and attachment 849
J&B Management Co., Fort Lee, N.J., Bernard Rodin, statement 2110
Lowey, Hon. Nita M., a Representative in Congress from the State of New
York, statement 2109
National Cooperative Business Center, Russell C. Notar, statement 2102
New York, Citv of, Hon. David N. Dinkins, Mayor, statement (see listing
under Multiple Issues heading)
PacifiCorp Financial Services, Portland, Ore., William E. Peressini, state-
ment 2098
Salem, Irving, and Carol A. Quinn, Latham & Watkins, New York, N.Y.,
statement 2104
TAX-EXEMPT BONDS
Alaska Aerospace Development Corp., Anchorage, Alaska, H.P. "Pat" Ladner,
statement 2114
Alaska Housing Finance Corp., statement 2117
American Association of Port Authorities, Jean C. Godwin, letter 2146
American Public Power Association, Larry Hobart, statement 2133
Barca, Hon. Peter W., a Representative in Congress from the State of Wiscon-
sin, statement 2129
Belz Investment Co., Inc., Memphis, Tenn., Jack A. Belz, statement (see
listing under Multiple Issues heading)
Connecticut, State of, Hon. Joseph M. Suggs, Jr., statement 2127
Council of Envelopment Finance Agencies, statement 2120
Edison Electric Institute, statement 2136
Kennelly, a Representative in Congress from the State of Connecticut, Hon.
Barbara B. statement (see listing under Multiple Issues heading)
Kleczka, Hon. Gerald D., a Representative in Congress from the State of
Wisconsin, statement 2131
Massachusetts Municipal Wholesale Electric Co., statement 2140
Matsui, Hon. Robert T., a Representative in Congress from the State of
California:
Statement 853
Statement 855
National Association of Bond Lawyers, statement 2141
XVI
Page
National Association of Independent Colleges and Universities; American
Council on Education; Association of American Universities, and National
Association of State Universities and Land Grant Colleges, Richard F.
Rosser, joint letter 2124
New Mexico, State of, Hon. Casey Luna, Lt. Governor, statement 2115
New York, City of, Hon. David N. Dinkins, Mayor, statement (see listing
under Multiple Issues heading)
Northeast FHiblic Power Association, Westborough, Mass., statement (see list-
ing under Multiple Issues heading)
Stanford University, Stanford, Calif., Peter Van Etten, statement 2122
Texas Veterans Land Board, Austin, Tex., Garry Mauro, statement 2118
Wisconsin Department of Veterans Affairs, Daniel D. Stier, letter 2119
COMPLIANCE
Brewster, Hon. Bill K., a Representative in Congress from the State of Okla-
homa, statement 1037
MISCELLANEOUS ISSUES
Allegheny Electric Cooperative, Inc., Harrisburg, Pa., Ed Uravic, letter 2178
American Bakers Association, Paul C. Abenante, letter 2191
American College of Trust and Estate Counsel, James M. Trapp, letter 2198
American Vintners Association, statement 2167
Arctic Slope Regional Corp., (joldbelt Corp., and Sealaska Corp., joint state-
ment 2151
Art Institute of Southern California, Laguna Beach, Calif., John W. Lottes,
letter 2159
Association of American Medical Colleges, Robert G. Petersdorf, M.D., letter .. 2193
Basin Electric Power Cooperative, Bismark, N.Dak., Robert L. McPhaU, state-
ment 2180
Belz Investment Co., Inc., Memphis, Tenn., Jack A, Belz, statement (see
listing under Multiple Issues heading)
D'Amato, Hon. Alfonse M., a United States Senator from the State of New
York, statement 2174
Dairymen, Inc., Boyd M. Cook, statement 2163
Harrington, Carol A., Kathryn G. Henkel, Carlyn S. McCaffrey, Lloyd Leva
Plaine, and Pam H. Schneider, American Bar Association, Real Property,
Probate & Trust Section, joint letter 2201
Harsch Investment Corp., Portland Ore., Harold and Arlene Schnitzer, state-
ment 2160
Kanjorski, Hon. Paul E., a Representative in Congress from the State of
Pennsylvania, statement 2169
Koncor Forest Products Co., Anchorage, Alaska, John Sturgeon, statement 2155
Maryville University, St. Louis, Mo., Keith Lovin, letter 2206
Moakley, Hon. John Joseph, a Representative in Congress from the State
of Massachusetts, statement 2196
Myers, Robert J., Silver Spring, Md., statement 2195
National Association for the Self-Employed, Bennie L. Thayer, letter (see
listing under Multiple Isssues heading)
NationS Presto Industries, Inc., Eau Claire, Wis., Joseph H. Bemey, state-
ment 2183
National Staff Leasing Association, Rob Lederer, letter 2186
Neal, Hon. Richard E., a Representative in Congress from the State of Massa-
chusetts, statement 2197
New York, State of, Vincent Tese, statement 2176
Shoshone and Arapaho Tribes' Joint Business Council, Fort Washakie, Wyo.,
Richard L. Ortiz, letter and attachment 2148
Sierra Semiconductor Corp., James V. Diller, statement and attachments 2187
Southland Corp., Dallas, Tex., Ronald L. Piatt, statement 2171
University of Arkansas, Fayetteville, Ark., A.H. Edwards, letter 2208
Western Farmers Electric Cooperative, Anadarko, Okla., James D.
Pendergrass, statement 2165
MULTIPLE ISSUES
Belz Investment Co., Inc., Memphis, Tenn., Jack A. Belz, statement 2209
Investment Co. Institute, statement 2211
XVII
Page
Kennelly, Hon. Barbara B., a Representative in Congress from the State
of Connecticut, statement 2219
National Association for the Self -Employed, Bennie L. Thayer, letter 2221
New York, City of, Hon. David N. Dinkins, Mayor, statement 2223
Northeast Public Power Association, Westborough, Mass., statement 2230
Combined Listing by Name and Organization (Losers)
Abenante, Paul C, American Bakers Association, letter 2191
Alaska Aerospace Development Corp., Anchorage, Alaska, H.P. "Pat" Ladner,
statement 2114
Alaska Housing Finance Corp., statement 2117
Alcoma Association, Inc., Lake Wales, Fla., Lawrence C. Updike, statement .... 1858
Allegheny Electric Cooperative, Inc., Harrisburg, Pa., Ed Uravic, letter 2178
AlliedSignal Inc., Ronald A. Sinaikin, statement 1908
American Association of Port Authorities, Jean C. Gfodwin, letter 2146
American Automobile Manufacturers Association, statement 1883
American Bakers Association, Paul C. Abenante, letter 2191
American College of Trust and Estate Counsel, James M. Trapp, letter 2198
American Council on Education, Richard F. Rosser, joint letter {see listing
for National Association of Independent Colleges and Universities
American Dental Association, statement and attachment 1926
American Farm Bureau Federation, statement 1957
American Gas Association, statement 2062
American Legion, Steve A. Robertson, statement 1887
American Methanol Institute, Rajrmond A. Lewis, statement 2069
American Petroleum Institute, statement 1961
American Public Power Association, Larry Hobart, statement 2133
American Public Power Association, Larry Hobart; National Rural Electric
Cooperative Association, Bob Bergland; and National Association of Regu-
latory Utility Commissioners, Thomas Choman, joint letter 2095
American Society for Payroll Management, Robert D. Williamson, statement .. 1917
American Vintners Association, statement 2167
Anderson, Kathy L., KPMG Peat Marwick, New York, N.Y., letter 1811
Appalachian Mountain Club, Boston, Mass., Jennifer Melville, statement 1942
Appalachian Trail Conference, Harpers Ferry, W.Va., John Stokes and David
N. Startzell, statement 1943
Arcari, Paul W., Military Coalition, letter 1929
Archer, John S., Commerce Bancshares, Inc., Kansas City, Mo., letter 1798
Arctic Slope Regional Corp., Goldbelt Corp., and Sealaska Corp., joint state-
ment 2151
Arkansas Electric Cooperative Corp., Carl S. Whillock, letter 1870
Art Institute of Southern California, Laguna Beach, Calif., John W. Lottes,
letter 2159
Associated Bank, NA, Neenah, Wis., Michael B. Mahlik, letter 1792
Associated Builders and Contractors, Inc., Charles E. Hawkins III, letter 1919
Association of American Medical Colleges, Robert G. Petersdorf, M.D., letter .. 2193
Association of American Universities (see listing for National Association
of Independent Colleges and Universities)
Association of Financial Guaranty Insurers, William A. Geoghegan, statement
and attachments 1837
August, Jerald David, Florida Bar, Tax Section, statement 1849
Baker, Michael C, Bamett Banks Trust Co., NA., Jacksonville, Fla., letter .... 1797
Baker, William C, Chesapeake Bay Foundation, Annapolis, Md., letter 1946
Bank Securities Association, statement 1793
Bank South, NA., Atlanta, Ga., J. Blake Young, Jr., letter 1796
Baptist Foundation of Oklahoma, James H. Lockhart, statement 1931
Barca, Hon. Peter W., a Representative in Congress from the State of Wiscon-
sin, statement 2129
Bamett Banks Trust Co., N.A., Jacksonville, Fla., Michael C. Baker, letter 1797
Bamett, Bruce H., Cargill, Inc., Minneapolis, Minn., statement and attach-
ments 2028
Basin Electric Power Cooperative, Bismark, N.Dak., Robert L. McPhail, state-
ment 2180
Beach, Dana, South Carolina Coastal Conservation League, Charleston, S.C,
statement 1952
XVIII
Page
Bedford County (Va.) Circuit Court, Hon. William W. Sweeney, letter (for-
warded by the Hon. L.F. Payne, a Representative in Congress from the
State of Virginia) 1896
Bell Atlantic Corp., statement and attachment 1965
Belz Investment Co., Inc., Memphis, Tenn., Jack A. Belz, statement 2209
Beneficial Corp., Gary J. Perkinson, statement 2012
Bergland, Bob, National Rural Electric Cooperative Association:
Statement 718
Statement 1871
Joint letter (see listing for American Public Power Association)
Bemey, Joseph H., National Presto Industries, Inc., Eau Claire, Wis., state-
ment 2183
Birdsall, Inc., Riviera Beach, Fla., John H. BLrdsall III, letter and attach-
ments 1997
Bonsall, Mark, Large Public Power Council, and Salt River Project of Phoenix,
Ariz., statement 2085
Boyd, Robert T., Kenetech/U.S. Windpower, statement 2088
Brandywine Conservancy, Chadds Ford, Pa., George A. Weymouth, state-
ment 1945
Brennan, Edward V., Gray, Gary, Ames & Frye, La JoUa, Calif., statement
and attachments 1934
Brewster, Hon. Bill, a Representative in Congress from the State of Okla-
homa:
Statement 1932
Statement 1037
Britt, Raymond L., Jr., Canadian Life and Health Insurance Association,
statement 1826
Building and Construction Trades Department, AFL-CIO, Robert A. Georgine,
statement 1921
Cahoon, Mark, Committee on State Taxation, statement 2026
Callahan, Kateri A., Electric Transportation Coalition, letter 2075
Canadian Life and Health Insurance Association, Raymond L. Britt, Jr.,
and Mary V. Harcar, statement 1826
Cargill, Inc., Minneapolis, Minn., Bruce H. Bamett, statement and attach-
ments 2028
Caribbean Latin American Action, Peter Johnson, letter 2009
Ceradini, Jr., August J., New York Cruise Lines, Inc., letter 1879
Chesapeake Bay Foundation, Annapolis, Md., William C. Baker, letter 1946
Chevron Corp.:
Statement 1985
Statement 2016
Choman, Thomas, National Association of Regulatory Utililty Commissioners,
joint letter (see listing for American FHiblic Power Association)
Chrysler Corp., Robert G. Liberatore, statement and attachment 1902
Chubb Corp., Warren, N.J., Dean R. CHare, statement 1970
City Utilities of Springfield, Mo., Robert E. Roundtree, letter (forwarded
by the Hon. Mel Hancock, a Representative in Congress from the State
of Missouri) 2074
Coleman, James P., First Source Bank, South Bend, Ind., letter 1804
Colonial Life & Accident Insurance Co., Inc., Columbia, S.C., statement and
attachment 1844
Columbia Gas Development Corp., Houston, Tex., Robert C. Williams, Jr.,
statement 2050
Commerce Bancshares, Inc., Kansas City, Mo., John S. Archer, letter 1798
Committee of Annuity Insurers, statement and attachment 1898
Committee on State Taxation, Mark Cahoon, statement 2026
Conifer Pacific, joint statement (see listing for Delson Lumber Co.)
Connecticut, State of, Hon. Joseph M. Suggs, Jr., statement 2127
Construction Financial Management Association, Joseph J. Lozano, state-
ment 1924
Cook, Boyd M., Dairymen, Inc., statement 2163
Council of Development Finance Agencies, statement 2120
Coyne, Daniel W., Mutual of America, letter 1836
Cnsalli, Donna M., Washington, D.C., statement 1889
D'Agostino Supermarkets, Inc., Larchmont, N.Y., Nicholas D'Agostino, Jr.,
letter 1885
D'Amato, Hon. Alfonse M., a United States Senator from the State of New
York, statement 2174
XIX
Page
Dairymen, Inc., Boyd M. Cook, statement 2163
Delson Lumber Co., Hardel Mutual Plywood Corp., Manke Lumber Co., and
Conifer Pacific, joint statement 2034
Delta Queen Steamboat Co., New Orleans, La., statement 1876
Destec Energy, Inc., Houston, Tex., Charles F. Goff, statement 2040
DiUer, James V., Sierra Semiconductor Corp., statement and attachments 2187
DiMatties, AJ., Midlantic National Bank, Edison, NJ., letter 1814
Dinkins, Hon. David N., Mayor, City of New York, statement 2223
Dutchess Land Conservancy, StanfordviUe, N.Y., Ira Stem, statement 1947
Edison Electric Institute, statement 2136
Edwards, A.H., University of Arkansas, Fayetteville, Ark., letter 2208
Electric Transportation Coalition, Kateri A. Callahan, letter 2075
Emereency Committee for American Trade, Robert L. McNeiU, letter 1975
ESOP Associ ation :
Statement 1901
J. Michael Keeling, statement 1906
Evans Economics, Inc., Washington, D.C., Michael K. Evans, letter 2006
Farley, E. Philip, Old Kent Bank and Trust Co., Grand Rapids, Mich., letter .. 1816
Federal-Mogul Corp., Detroit, Mich., Robert C. Rozycki, statement 2019
Federation of American Controlled Shipping, Philip J. Loree, statement 1987
First FideUty Bank, NA., New Jersey, John J. Phillips, letter 1799
First National Bank of Chicago, Michael P. Traba, statement 1801
Fu^t Source Bank, South Bend, Ind., James P. Coleman, letter 1804
First Trust National Association, St. Paul, Minn., John M. Murphy, Jr.,
letter 1805
Florida Btir, Tax Section, Jerald David August, statement 1849
Ford, Hon. Harold E., a Representative in Congress from the State of
Tennesses, statement and attachment 849
General Motors Corp., statement 2014
Geoghegan, William A., Association of Financial Guaranty Insurers, state-
ment and attachments 1837
Georgine, Robert A., Building and Construction Trades Department, AFL-
CIO, statement 1921
Godwin, Jean C, American Association of Port Authorities, letter 2146
Goff, Charles F., Destec Energy, Inc., Houston, Tex., statement 2040
Goldbelt Corp., joint statement {see listing for Arctic Slope Regional Corp.)
Goodman, Craig G., Mitchell Energy & Development Corp., The Woodlands,
Tex., letter and attachment 2059
GrifTm Industries, Inc., Cold Spring, Kv., Dennis B. Grifiin, statement 1864
Harcar, Mary V., Canadian Life and. Health Insurance Association, state-
ment 1826
Hardel Mutual Plywood Corp., joint statement (see listing for Delson Lumber
Co.)
Harper, H. Mitchell, Texas Commerce Investment Co., Houston, Tex., letter ... 1818
Harrington, Carol A., Kathryn G. Henkel, Carlyn S. McCaffrey, Llovd Leva
Plaine, and Pam H. Schneider, American Bar Association, Real Property,
Probate & Trust Section, joint letter 2201
Harsch Investment Corp., Portland Ore., Harold and Arlene Schnitzer, state-
ment 2160
Hastings, Barry G., Northern Trust Co., Chicago, 111., letter 1815
Hawaiian Trust Co., Ltd., Honolulu, Hawaii, Douglas Philpotts, letter 1807
Hawkins, Charles E., Ill, Associated Builders and Contractors, Inc., letter 1919
Heffelfinger, Rich, Independent Oil and Gas Association of West Virginia,
statement 2044
Henkel, Kathryn G., American Bar Association, Real Property, Probate &
Trust Section, ioint letter (see listing for Carol A. Harrington)
Herman, Michael E., Kansas City Royals Baseball, statement 1385
Hobart, Larry, American Public Power Association; National Rural Electric
Cooperative Association, Bob Bergland; and National Association of Regu-
latory Utility Commissioners, Thomas Choman, joint letter 2095
Hobart, Larry, American Public Power Association, statement 2133
Hocker, Jean W., Land Trust Alliance, statement 1948
Hynes, Timothy J., Ill, Security Trust Co., NA., Baltimore, Md., letter 1817
Illinois Supreme Court, Hon. Benjamin K. Miller, Chief Justice, letter and
attachment 1893
Independent Bankers Association of America, James R. LaufTer, statement 1809
Independent Oil and Gas Association of West Virginia, Rich Hefielfinger,
statement 2044
XX
Page
Independent Petroleum Association of America, Roy W. Willis, letter 2080
Information Tecnology Association of America, Luanne James, statement 1984
Investment Co. Institute, statement 2211
J&B Management Co., Fort Lee, N.J., Bernard Rodin, statement 2110
James, Luanne, Information Tecnology Association of America, statement 1984
Jenner, Gregory F., and Ronald L. Piatt, McDermott, Will & Emery, Washing-
ton, D.C., statement 1958
Johnson, Hon. Nancy L., a Representative in Congress from the State of
Connecticut:
Statement 609
Statement 851
Johnson, Peter, Caribbean Latin American Action, letter 2009
Kanjorski, Hon. Paul E., a Representative in Congress from the State of
Pennsylvania, statement 2162
Kansas City Royals Baseball, Michael E. Herman, statement 1385
Keeling, J. Michael, ESOP Association, statement 1906
KenetechAJ.S. Windpower, Robert T. Boyd, statement 2088
Kennelly, Hon. Barbara B., a Representative in Congress from the State
of Connecticut, statement 2219
Kirkmire, Nicholas J., Washington Citizens for World Trade, Olympia, Wash.,
statement 2093
Kleczka, Gerald D., a Representative in Congress from the State of Wisconsin,
statement 2131
Koncor Forest Products Co., Anchorage, Alaska, John Sturgeon, statement 2155
KPMG Peat Marwick, New York, N.Y., Kathy L. Anderson, letter 1811
Kuehne, M.J. "Gus", Northwest Independent Forest Manufacturers, Tacoma,
Wash., statement and attachment 2036
Lackritz, Marc E., Securities Industry Association, statement 1823
Ladner, H.P. 'Tat", Alaska Aerospace Development Corp., Anchorage, Alaska,
statement 2114
Land Trust Alliance, Jean W. Hocker, statement 1948
Large Public Power Council, Phoenix, Ariz., Mark Bonsall, statement 2085
Lauffer, James R., Independent Bankers Association of America, statement .... 1809
LeBoeuf, Raymond W., PPG Industries, Inc., statement 1911
Lederer, Rob, National Staff Leasing Association, letter 2186
Leszinske, William O., Texas Commerce Investment Co., Houston, Tex., let-
ter 1819
Lewis, Raymond A., American Methanol Institute, statement 2069
Liberatore, Robert G., Chrysler Corp., statement and attachment 1902
Lockhart, James H., Baptist Foundation of Oklahoma, statement 1931
Loree, Philip J., Federation of American Controlled Shipping, statement 1987
Los Angeles, Calif., City of, statement 2083
Lottes, John W., Art Institute of Southern California, Laguna Beach, Calif.,
letter 2159
Louisiana Land & Exploration Co., New Orleans, La., Lei^ton Steward,
statement 2054
Lovin, Keith, Maryville University, St. Louis, Mo., letter 2206
Lowey, Hon. Nita M., a Representative in Congress from the State of New
York, statement 2109
Lozano, Joseph J., Construction Financial Management Association, state-
ment 1924
Luna, Hon. Casey, Lt. Governor, State of New Mexico, statement 2115
Magna Trust Co., Belleville, 111., Peter C. Merzian, letter 1812
Mahlik, Michael B., Associated Bank, N.A, Neenah, Wis., letter 1792
Manke Lumber Co., joint statement {.see listing for Delson Lumber Co.) 2034
Maryville University, St. Louis, Mo., Keith Lovin, letter 2206
Massachusetts Municipal Wholesale Electric Co., statement 2140
Matsui, Hon. Robert T., a Representative in Congress from the State of
California:
Statement 674
Statement 730
Statement 853
Statement 855
Mauro, Garry, Texas Veterans Land Board, Austin, Tex., statement 2118
McCaffrey, Caryln S., American Bar Association, Real Property, Probate &
Trust Section, joint letter {see listing for Carol A. Harrington)
McClure, Trotter & Mentz, Chtd., Washington, D.C., William P. McClure,
statement 2023
XXI
Page
McNeill, Robert L., Emergency Committee for American Trade, letter 1975
McPhaU, Robert L., Basin Electric Power Cooperative, Bismark, N.Dak.,
statement 2180
MDU Resources Group, Inc., Bismaric, N.Dak., Robert E. Wood, statement 2057
Melville, Jennifer, Appalachian Mountain Club, Boston, Mass., statement 1942
Meridian Asset Management, Inc., Valley Forge, Pa., Robert C. Williams,
letter 1813
Merzian, Peter C, Magna Trust Co., Belleville, DL, letter 1812
Midlantic National Bank, Edison, NJ., AJ. DiMatties, letter 1814
Military Coalition, Michael Ouelette and Paul W. Arcari, letter 1929
MUler, Hon. Benjamin K., Chief Justice, Dlinois Supreme Court, letter and
attachment 1893
Mitchell Energy & Development Corp., The Woodlands, Tex., Craig G. Good-
man, letter and attachment 2059
Moakley, Hon. John Joseph, a Representative in Congress from the State
of Massachusetts, statement 2196
Murphy, John M., Jr., First Trust National Association, St. Paul, Minn.,
letter 1805
Mutual of America, Daniel W. Coyne, letter 1836
Myers, Robert J., Silver Spring, Md., statement 2195
National Association for the Self-Employed, Bennie L. Thayer, letter 2221
National Association of Bond Lawyers, statement 2141
National Association of Independent Colleges and Universities; American
Council on Education; and National Association of State Universities and
Land Grant Colleges, Richard F. Rosser, joint letter 2124
National Association of Regulatory Utililty Commissioners:
Thomas Choman, joint letter (see listing for American Public Power Asso-
ciation)
Linda Bisson Stevens, letter and attachments 1787
National Association of State Universities and Land Grant Colleges, Richard
F. Rosser, joint letter (see listing for National Association of Independent
Colleges and Universities)
National Cooperative Business Center, Russell C. Notar, statement 2102
National Foreign Trade Council, Inc., statement 1976
National Presto Industries, Inc., Eau Claire, Wis., Joseph H. Bemey, state-
ment 2183
National Rural Electric Cooperative Association, Bob Bergland:
Joint letter (see listing for American Public Power Association)
Statement 718
Statement 1871
National Staff Leasing Association, Rob Lederer, letter 2186
Natural Resources Defense Council, Marika Tatsutani, statement 2084
Neal, Hon. Richard E., a Representative in Congress from the State of Massa-
chusetts, statement 2197
New Mexico, State of, Hon. Casey Luna, Lt. Governor, statement 2115
New York, City of, Hon. David N. Dinkins, Mayor, statement 2223
New York Cruise Lines, Inc., August J. Ceradini, Jr., letter 1879
New York, State of, Vincent Tese, statement 2176
Non Commissioned Officers Association of the United States of America,
Larry D. Rhea and Michael F. Ouelette, statement 1913
Northeast Public Power Association, Westborough, Mass., statement 2230
Northern Trust Co., Chicago, HI, Barry G. Hastings, letter 1815
Northwest Independent Forest Manufacturers, Tacoma, Wash., M.J. "Gus"
Kuehne, statement and attachment 2036
Notar, Russell C, National Cooperative Business Center, statement 2102
Novack, Kenneth M., Schnitzer Investment Corp., Portland, Ore., statement .. 1866
©"Hare, Dean R., Chubb Corp., Warren, NJ., statement 1970
Old Kent Bank and Trust Co., Grand Rapids, Mich., E. Philip Farley, letter ... 1816
Oregon Trout, Inc., Portland, Ore., Geoff Pampush, letter 1950
Ortiz, Richard L., Shoshone and Arapaho Tribes' Joint Business Council,
Fort Washakie, Wyo., letter and attachment 2148
Ouelette, Michael:
Militaiy Coalition, letter 1929
Non Commissioned Officers Association of the United States of America,
statement 1913
PacifiCorp Financial Services, Portland, Ore., William E. Peressini, state-
ment 2098
Pampush, Geoff, Oregon Trout, Inc., Portland, Ore., letter 1950
XXII
Page
Passenger Vessel Association, Eric G. Scharf, letter 1880
Pendei^ass, James D., Western Farmers Electric Cooperative, Anadarko,
Okla., statement 2165
Peressini, William E., PacifiCorp Financial Services, Portland, Ore., state-
ment 2098
Perkinson, Gary J., Beneficial Corp., statement 2012
Perlman, Robert H., Tax Executives Institute, Inc., letter 1981
Petersdorf, M.D., Robert G., Association of American Medical Colleges, letter . 2193
Phillips, John J., First Fidelity Bank, NA., New Jersey, letter 1799
Philpotts, Douglas, Hawaiian Trust Co., Ltd., Honolulu, Hawaii, letter 1807
Plaine, Lloyd Leva, American Bar Association, Real Property, Probate &
Trust Section, joint letter (see listing for Carol A. Harrington)
Piatt, Ronald L., and Gregory F. Jenner, McDermott, Will & Emery, Washing-
ton, D.C., statement 1958
Piatt, Ronald L., Southland Corp., Dallas, Tex., statement 2171
PPG Industries, Inc., Raymond W. LeBoeuf, statement 1911
Quaal, Ward L., Ward L. Quaal Co.. statement 1954
Quinn, Carol A., and Irving Salem, Latham & Watkins, New York, N.Y.,
statement 2104
Rahall, Hon. Nick J., II, a Representative in Congress from the State of
West Virginia, statement 1890
Rhea, Larry D., Non Commissioned Officers Association of the United States
of America, statement 1913
Robertson, Steve A., American Legion, statement 1887
Rodin, Bernard, J&B Management Co., Fort Lee, NJ., statement 2110
Rosser, Richard F., National Association of Independent Colleges and Univer-
sities; American Council on Education; and National Association of State
Universities and Land Grant Colleges,ioint letter 2124
Roundtree, Robert E., City Utilities of Springfield, Mo., letter (forwarded
by the Hon. Mel Hancock, a Representative in Congress from the State
of Missouri) 2074
Rozycki, Robert C, Federal-Mogul Corp., Detroit, Mich., statement 2019
Sacramento, Calif., Municipal Utility District, statement 2096
Salem, Irving, and Carol A. Quinn, Latham & Watkins, New York, N.Y.,
statement 2104
Salt River Project of Phoenix, Ariz., Mark Bonsall, statement 2085
Save the Bay, Providence, R.L, Curt Spalding, letter 1951
Savings Bank Life Insurance Co., Wobum, Mass., Robert K. Sheridan, state-
ment 1820
Savville Ferry, Sayville, N.Y., Ken Stein, Jr., letter 1882
Scharf, Eric G., Passenger Vessel Association, letter 1880
Schneider, Pam H., American Bar Association, Real Property, Probate &
Trust Section, joint letter (see listing for Carol A. Harrington)
Schnitzer, Harold and Arlene, Harsch Investment Corp., Portland Ore., state-
ment 2160
Schnitzer Investment Corp., Portland, Ore., Kenneth M. Novack, statement ... 1866
Sealaska Corp., joint statement (see listing for Arctic Slope Regional Corp.)
Securities Industry Association, Marc E. Lackritz, statement 1823
Security Trust Co., N.A., Baltimore, Md., Timothy J. Hynes III, letter 1817
Shaw, Hon. E. Clay, Jr., a Representative in Congress from the State of
Florida, statement 1996
Sheridan, Robert K., Savings Bank Life Insurance Co., Wobum, Mass., state-
ment 1820
Shoshone and Arapaho Tribes' Joint Business Council, Fort Washakie, Wyo.,
Richard L. Ortiz, letter and attachment 2148
Sierra Semiconductor Corp., James V. Diller, statement and attachments 2187
Sinaikin, Ronald A., AlliedSignal Inc., statement 1908
Solo Cup Co., statement 1859
South Carolina Coastal Conservation League, Charleston, S.C, Dana Beach,
statement 1952
Southern California Public Power Authority, Pasadena, Calif., statement 2086
Southland Corp., Dallas, Tex., Ronald L. Piatt, statement 2171
Spalding, Curt, Save the Bay, Providence, R.I., letter 1951
Stanford University, Stanford, Calif., Peter Van Etten, statement 2122
Startzell, David N., Appalachian Trail Conference, Harpers Ferry, W.Va.,
statement 1943
Stein, Ken, Jr., Sayville Ferry, Sayville, N.Y., letter 1882
Stem, Ira, Dutchess Land Conservancy, Stanfordville, N.Y., statement 1947
XXIII
Page
Stevens, Linda Bisson, National Association of Regulatory Utility Commis-
sioners, letter and attachments 1787
Steward, Leighton, Louisiana Land & Exploration Co., New Orleans, La.,
statement 2054
Stier, Daniel D., Wisconsin Department of Veterans Affairs, letter 2119
Stokes, John, Appalachian Trail Conference, Harpers Ferry, W.Va., state-
ment 1943
Stump, Hon. Bob, a Representative in Congress from the State of Arizona,
letter and attachment 1892
Sturgeon, John, Konoor Forest Products Co., Anchorage, Alaska, statement .... 2155
Suggs, Hon. Joseph M., Jr., Connecticut, State of, statement 2127
Sweeney, Hon. William W., Bedford County (Va.) Circuit Court, letter (for-
warded by the Hon. L.F. Payne, a Representative in Congress from the
State of Virginia) 1896
Tampa (Fla.) Electric Co., statement 2042
Tatsutani, Marika, Natural Resources Defense Council, statement 2084
Tax Executives Institute, Inc., Robert H. Perlman, letter 1981
Tese, Vincent, State of New York, statement 2176
Texas Commerce Investment Co., Houston, Tex.:
H. Mitchell Harper, letter 1818
William O. Leszinske, letter 1819
Texas Veterans Land Board, Austin, Tex., Garry Mauro, statement 2118
Thayer, Bennie L., National Association for the Self-Employed, letter 2221
Traba, Michael P., First National Bank of Chicago, statement 1801
Trapp, James M., American College of Trust andEstate Counsel, letter 2198
University of Arkansas, Fayetteville, Ark., A.H. Edwards, letter 2208
Updike, Lawrence C, Alcoma Association, Inc., Lake Wales, Fla., statement ... 1858
Uravic, Ed, Allegheny Electric Cooperative, Inc., Harrisburg, Pa., letter 2178
USX Corp., statement 2091
Van Etten, Peter, Stanford University, Stanford, Calif., statement 2122
Ward L. Quaal Co., Ward L. Quaal, statement 1954
Washington Citizens for World Trade, Olympia, Wash., Nicholas J. Kiricmire,
statement 2093
Wells Manufacturing Co., statement 1862
Western Farmers Electric Cooperative, Anadarko, Okla., James D.
Pendergrass, statement 2165
Weymouth, George A., Brandywine Conservancy, Chadds Ford, Pa., state-
ment 1945
Whillock, Carl S., Arkansas Electric Cooperative Corp., letter 1870
Williams, Robert C, Jr., Columbia Gas Development Corp., Houston, Tex.,
statement 2050
Williams, Robert C, Meridian Asset Management, Inc., Valley Forge, Pa.,
letter 1813
Williamson, Robert D., American Society for Payroll Management, statement . 1917
Willis, Roy W., Independent Petroleum Association of America, letter 2080
Wisconsin Department of Veterans Affairs, Daniel D. Stier, letter 2119
Wise, Hon. Bob, a Representative in Congress from the State of West Vir-
ginia, letter and attachments 2045
Wood, Robert E., MDU Resources Group, Inc., Bismark, N.Dak., statement .... 2057
Worthy, K. Martin, Hopkins & Sutter, Washington, D.C., statement 611
Young, J. Blake, Jr., Bank South, NA., Atlanta, Ga., letter 1796
Listing by Subject— Revenue Raisers
Business Roundtable, statement 2233
National Society of Public Accountants, Leroy A. Strubberg, and Jeffrey A.
Lear, statement 2235
alternative minimum tax
American Forest and Paper Association, statement (see listing under Multiple
Issues heading)
Coal Tax Committee, statement 2240
National Coal Association, Richard L. Lawson, statement 2237
XXIV
Page
ACCOUNTING
American Bankers Association, statement {see listing under Multiple Issues
heading)
American Electronics Association, statement (see listing under Multiple Issues
heading)
American Forest and Paper Association, statement (see listing under Multiple
Issues heading)
American Trucking Associations, Inc., statement (see listing under Multiple
Issues heading)
Barth, James P., North Bend, Ohio, letter 2243
Black Entertainment Television, Robert L. Johnson, letter 2244
Burt, R.L., Southampton, Mass., letter (see listing under Multiple Issues
heading)
Center for the Study of Commercialism, Michael F. Jacobson, letter 2245
Centex Corp., Dallas, Tex., Richard C. Harvey, letter (see listing under Mul-
tiple Issues heading)
Danaher Corp., Washington, D.C., James H. DitkofF, letter and attachment .... 2249
Edwin L. Cox Co., Dallas, Tex., J. Oliver McGonigle, letter 2251
Fisher, John J., Barrington, 111., letter 2252
Food Marketing Institute, and International Mass Retail Association, joint
statement 2253
Larsen, Bryant & Porter, CPA'S, P.C., Lincoln, Neb., Brent L. Stehlik, letter
(see listing under Multiple Issues heading)
Mattel, Inc., statement 2255
Miles Inc., Pittsburgh, Pa., Helge H. Wehmeier, letter 2257
National Association of Enrolled Agents, James E. Forrester, statement (see
listing under Multiple Issues heading)
National Association of Realtors, statement (see listing under Multiple Issues
heading)
Ralston Purina Co., Ronald B. Weinel, statement and attachments 2258
Retail Tax Committee of Common Interest, statement 2263
Sundquist, Hon. Don, a Representative in Congress from the State of Ten-
nessee, statement 2266
Tax Executives Institute, Inc., Ralph J. Weiland, statement (see listing under
Multiple Issues heading)
True Companies, Casper, Wyo., statement (see listing under Multiple Issues
heading)
United States Telephone Association, John Sodolski, statement (see listing
under Multiple Issues heading)
FINANCIAL INSTITUTIONS
American Bankers Association, statement (see listing under Multiple Issues
heading)
Centex Corp., Dallas, Tex., Richard C. Harvey, letter (see listing under Mul-
tiple Issues heading)
Fidelty Federal Bank, Glendale, Calif., Kathleen A. Christianson, letter 2267
KPMG Peat Marwick, statement 2268
COST RECOVERY
Kieffer-Nolde, Chicago, LI., Neil J. Schecter, letter 2278
Laser Graphics, Inc., Hillside, 111., Steve Giusti, letter 2279
National Association of Water Companies, James L. (Jood, statement 2274
Sundquist, Hon. Don, a Representative in Congress from the State of Ten-
nessee, statement 2280
Techtron Imaging Centre, Chicago, 111., Walter C. Pabst, letter 2281
XXV
Page
INDIVIDUAL INCOME TAX
American Greyhound Track Operators Association, Henry C. Cashen and
John C. Dill, statement (see listing under Multiple Issues heading)
American Horse Council, Inc., statement (see listing under Multiple Issues
heading)
Americsm Trucking Associations, Inc., statement (see listing under Multiple
Issues heading)
Bilbray, Hon. James H., a Representative in Congress from the State of
Nevada, statement (see listing under Multiple Issues heading)
Bryan, Hon. Richard, a United States Senator from the State of Nevada,
statement (see listing under Multiple Issues heading)
Burt, R.L., Southampton, Mass., letter (see listing under Multiple Issues
heading)
Coopers & Lybrand, Washington, D.C., statement 2284
Customs Science Services, Inc., Kensington, Md., Roger J. Crain, letter 2283
Larsen, Bryant & Porter, CPA's, P.C, Lincoln, Neb., Brent L. StehUk, letter
(see listing under Multiple Issues heading)
National Association for the Self-Employed, Bennie L. Thayer, letter (see
listing under Multiple Issues heading)
National Association of Enrolled Agents, James E. Forrester, statement (see
listing under Multiple Issues heading)
National Association of Realtors, statement (see listing under Multiple Issues
heading)
National Conference of State Social Security Administrators, Daryl Dunagan,
letter (see listing under Multiple Issues heading)
Nevada Resort Association, David Belding, statement 2287
Reid, Hon. Harry, a United States Senator from the State of Nevada, state-
ment (see listing under Multiple Issues heading)
SeaWest, San Diego, Calif., Thomas G. Famham, letter 2290
Swavelle/Mill Creek Fabrics, New York, N.Y., Jeffrey B. Kraut, letter 2282
True Companies, Casper, Wyo., statement (see listing under Multiple Issues
heading)
United States Telephone Association, John Sodolski, statement (see listing
under Multiple Issues heading)
Vucanovich, Hon. Barbara F., a Representative in Congress from the State
of Nevada, statement (see listing under Multiple Issues heading)
NATURAL RESOURCES
American Trucking Associations, Inc., statement (see listing under Multiple
Issues heading)
Center for International Environmental Law, Robert F. Housman, statement . 2294
National Petroleum Refiners Association, Urvan R. Stemfels, letter 2298
Reid, Hon. Harry, a United States Senator from the State of Nevada, state-
ment 2291
True Companies, Casper, Wyo., statement (see listing under Multiple Issues
heading)
FOREIGN TAX PROVISIONS
American Bankers Association, statement (see listing under Multiple Issues
heading)
American Electronics Association, statement (see listing under Multiple Issues
heading)
American Federation of Labor and Congress of Industrial Organizations, Rob-
ert E. Lucore, statement 2325
American Forest and Paper Association, statement (see listing under Multiple
Issues heading)
American Petroleum Institute, statement (see listing under Multiple Issues
heading)
American Trucking Associations, Inc., statement (see listing under Multiple
Issues heading)
Arthur Andersen & Co., Andre P. Fogarasi and Richard A. Gordon, state-
ment 2329
Association of British Insurers, statement 2339
Attorneys' Liability Assurance Society, Inc., John E. Chapoton and Thomas
A. Stout, Jr., letter 2345
XXVI
Page
Danaher Corp., Washington, D.C., James H. DitkofT, letter 2337
Export Source Coalition, Paul W. Oosterhuis and Roseann M. Cutrone, state-
ment and attachments 2299
International Tax Policy Forum, Joel Slemrod, statement and attachment 2309
Kennelly, Hon. Barbara B., a Representative in Congress from the State
of Connecticut, letter and attachments 2350
National Association of Insurance Brokers, Michael J. Hass, letter 2364
Organization for International Investment Inc., Alexander Spitzer, statement
and attachments (see listing under Multiple Issues heading)
Public Securities Association, statement 2318
Reinsurance Association of America, statement 2366
Risk and Insurance Management Society, Inc., Paul S. Brown, letter 2374
Securities Industry Association, Marc E. Lackritz, statement 2320
Tax Executives Institute, Inc., Ralph J. Weiland, statement (see listing under
Multiple Issues heading)
United States Council for International Business:
Statement 2312
Statement 2324
United States Telephone Association, John Sodolskl, statement (see listing
under Multiple Issues heading)
United Technologies, William F. Paul, letter 2316
EXCISE TAXES
American Forest and Paper Association, statement and attachment 2399
American Horse Council, Inc., statement (see listing under Multiple Issues
heading)
American Trucking Associations, Inc., statement (see listing under Multiple
Issues heading)
Asociacion de Exportadores De Chile (Chilean Exporter's Association), Ronald
S. Bown F., letter and attachment 2402
Association of Home Appliance Manufacturers, statement 2407
Bilbray, Hon. James H., a Representative in Congress from the State of
Nevada, statement (see listing under Multiple Issues heading)
Bryan, Hon. Richard, a United States Senator from the State of Nevada,
statement (see listing under Multiple Issues heading)
Carrier Corp., Syracuse, N.Y., Edward A. Baily, letter 2409
Cetylite Industries, Inc., Pennsauken, NJ., Stanley L. Wachman, statement .. 2410
Mack Trucks, Inc., Mark Cherry, statement and attachments 2388
National Cable Television Association, Decker Anstrom, statement 2381
National Truck Equipment Association, Michael E. Kastner, letter and at-
tachment 2396
Nevada Resort Association, David Belding, statement 2378
Newspaper Association of America, statement 2382
Organization for International Investment Inc., Alexander Spitzer, statement
and attachments(sce listing under Multiple Issues heading)
Polyisocyanurate Insulation manufacturers Association, Jared O. Blum, state-
ment 2412
Reid, Hon. Harry, a United States Senator from the State of Nevada, state-
ment (see listing under Multiple Issues heading)
Renewable Fuels Association, Eric Vaughn, statement 2383
Society of the Plastics Industry, Inc., Maureen A. Healey, letters and attach-
ments 2416
Tax Executives Institute, Inc., Ralph J. Weiland, statement (see listing under
Multiple Issues heading)
Truck Trailer Manufacturers Association, Richard P. Bowling, letter 2398
True Companies, Casper, Wyo., statement (see listing under Multiple Issues
heading)
United States Telephone Association, John Sodolski, statement (see listing
under Multiple Issues heading)
Vucanovich, Hon. Barbara F., a Representative in Congress from the State
of Nevada, statement (see listing under Multiple Issues heading)
Whirlpool Corp., Michael C. Thompson, statement 2421
TAX-EXEMPT ENTITIES
Alliance for Justice, Nan Aron and Carol Siefert, letter and attachment 2431
American Association of Museums, Edward H. Able, Jr., letter 2436
XXVII
Page
AmericEin Gas Association, statement (see listing under Multiple Issues head-
ing)
American Petroleum Institute, statement (see listing under Multiple Issues
heading)
American Trucking Associations, Inc., statement (see listing under Multiple
Issues heading)
Center for Non -Profit Corporations, Princeton, NJ., Linda M. Czipo, letter 2438
Independent Bankers Association of America, statement (see listing under
Multiple Issues heading)
National Association of Convenience Stores, statement (see listing under Mul-
tiple Issues heading)
National Association of Realtors, statement (see listing under Multiple Issues
heading)
National Club Association, statement 2423
National Panhellenic Conference, Harriett B. Macht; National Pan -Hellenic
Council, Inc., Daisy Wood; and National Interfratemity Conference, Robert
D. Lynd, joint statement and attachment 2426
National Venture Capital Association, Dean C. (Jordanier, Jr., letter 2440
Tax Executives Institute, Inc., Ralph J. Weiland, statement (see listing under
Multiple Issues heading)
True Companies, Casper, Wyo., statement (see listing under Multiple Issues
heading)
United States Telephone Association, John Sodolski, statement (see listing
under Multiple Issues heading)
COMPLIANCE
American Bankers Association, statement (see listing under Multiple Issues
heading)
American Electronics Association, statement (see listing under Multiple Issues
heading)
American Forest and Paper Association, statement (see listing under Multiple
Issues heading)
American Gas Association, statement (see listing under Multiple Issues head-
ing)
American Greyhound Track Operators Association, Henry C. Cashen and
John C. Dill, statement (see listing under Multiple Issues heading)
American Horse Council, Inc., statement (see listing under Multiple Issues
heading)
American Land Title Association, Ann vom Eigen, statement 2447
American Trucking Associations, Inc., statement (see listing under Multiple
Issues heading)
Bilbray, Hon. James H., a Representative in Congress from the State of
Nevada, statement (see listing under Multiple Issues heading)
Bryan, Hon. Richard, a United States Senator from the State of Nevada,
statement (see listing under Multiple Issues heading)
Burt, R.L., Southampton, Mass., letter (see listing under Multiple Issues
heading)
Coalition on Interest Disallowance, statement 2455
Federation of Tax Administrators, Harley T. Duncan, statement and attach-
ment 2449
CJomola, Gary R., Coughlin & Gomola, Middletown, Conn., letter 2453
Independent Bankers Association of America, statement (see listing under
Multiple Issues heading)
Larsen, Bryant & Porter, CPA's, P.C, Lincoln, Neb., Brent L. Stehlik, letter
(see listing under Multiple Issues heading)
Levenson, Daniel D., Lourie & Cutler, P.C, Boston, Mass., statement 2461
National Association for the Self-Em ployed, Bennie L. Thayer, letter (see
listing under Multiple Issues heading)
National Association of Convenience Stores, statement (see listing under Mul-
tiple Issues heading)
National Association of Enrolled Agents, James E. Forrester, statement (see
listing under Multiple Issues heading)
National Conference of State Social Security Administrators, Daryl Dunagan,
letter (see listing under Multiple Issues heading)
Nevada Resort Association, David Belding, statement 2458
XXVIII
Page
Reid, Hon. Harry, a United States Senator from the State of Nevada, state-
ment (see listing under Multiple Issues heading)
Tax Executives Institute, Inc., Ralph J. Weiland, statement (see listing under
Multiple Issues heading)
True Companies, Casper, Wyo., statement (see listing under Multiple Issues
heading)
United States Telephone Association, John Sodolski, statement (see listing
under Multiple Issues heading)
Vucanovich, Hon. Barbara F., a Representative in Congress from the State
of Nevada, statement (see listing under Multiple Issues heading)
MISCELLANEOUS ISSUES
Alliance Exchange Group, Inc., Santa Ana, Calif., Deanna F. Burton, letter .... 2498
American Electronics Association, statement (see listing under Multiple Issues
heading)
American Equity Exchange, Inc., Dillon, Mont., Max A. Hansen, letter 2499
American Forest and Paper Association, statement (see listing under Multiple
Issues heading)
American Gas Association, statement (see listing under Multiple Issues head-
ing)
American Land Title Association, Ann vom Eigen, statement 2500
American Petroleum Institute, statement (see listing under Multiple Issues
heading)
American Trucking Associations, Inc., statement (see listing under Multiple
Issues heading)
Bishop, Barbara, Pasedena, Calif., letter 2502
Building and Construction Trades Department, AFL-CIO, Robert A. Georgine,
statement 2463
Coalition for Independent Contractors, Edward N. Delaney and Russell A.
Hollrah, statement 2469
Environcol, James C. (}odbout, Diane Herndon, and Mary Frances Pearson,
statement 2513
Equitv Advantage, Inc., Salem, Ore., Lonnie C. Nielson, Thomas N. Moore,
and David S. Moore, letter 2503
Equity Reserve, Inc., Newport Beach, Calif., Frank C. Huntsman, letter 2504
Federation of Exchange Accommodators, Newport Beach, Calif., Andrew G.
Potter, letter 2505
Hulen, Myron, Colorado State University; William Kinny, Portland State
University; Jack Robison, California Polytechnic State University; and Mi-
chael Vaughan, Colorado State University, joint statement 2474
Independent Fuel Terminal Operators Association, statement and attach-
ment 2518
International Council of Shopping Centers, Steven J. Guttman, statement 2507
Lantos, Hon. Tom, a Representative in Congress from the State of California,
statement 1379
National Association for the Self-Employed, Bennie L. Thayer, letter (see
listing under Multiple Issues heading)
Nationsd Association of Convenience Stores, statement (see listing under Mul-
tiple Issues heading)
National Association of Realtors, statement (see listing under Multiple Issues
heading)
National Federation of Independent Business, statement 2482
New York Gas Group, Donald F. Straetz, statement 2523
Real Estate Exchange, Inc., Portland, Ore., James C. Casterline, letter 2510
Security Trust Co., San Diego, Calif., J. Paul Spring, letter 2512
Shays, Hon. Christopher, a Representative in Congress from the State of
Connecticut, statement 1382
Stratford Technologies, Inc., Somerdale, NJ., William R. Patterson, letter 2490
Studds, Hon. Gerry E., a Representatives in Congress from the State of
Massachusetts, statement 2497
Tax Executives Institute, Inc., Ralph J. Weiland, rtatement (see listing under
Multiple Issues heading)
True Companies, Casper, Wyo., statement (see listing under Multiple Issues
heading)
United Brotherhood of Carpenters and Joiners of America, AFL-CIO, state-
ment 2492
XXIX
Page
United States Telephone Association, John Sodolski, statement (see listing
under Multiple Issues heading)
MULTIPLE ISSUES
American Bankers Association, statement 2525
American Electronics Association, statement 2529
American Forest and Paper Association, statement 2533
American Gas Association, statement 2535
American Greyhound Track Operators Association, Heniy C. Cashen and
John C. Dill, statement 2544
American Horse Council, Inc., statement 2546
American Petroleum Institute, statement 2551
American Trucking Associations, Inc., statement 2560
Bilbray, Hon. James H., a Representative in Congress from the State of
Nevada, statement 2563
Bryan, Hon. Richard, a United States Senator from the State of Nevada,
statement 2564
Burt, R.L., Southampton, Mass., letter 2566
Centex Corp., Dallas, Tex., Richard C. Harvey, letter 2567
Independent Bankers Association of America, statement 2568
Larsen, Bryant & Porter, CPA's, P.C., Lincoln, Neb., Brent L. Stehlik, letter .. 2570
National Association for the Self-Employed, Bennie L. Thayer, letter 2573
National Association of Convenience Stores, statement 2576
National Association of Enrolled Agents, James E. Forrester, statement 2580
National Association of Realtors, statement 2583
National Conference of State Social Security Administrators, Daryl Dunagan,
letter 2587
Organization for International Investment Inc., Alexander Spitzer, statement
and attachments 2589
Reid, Hon. Harry, a United States Senator from the State of Nevada, state-
ment 2597
Tax Executives, Inc., Ralph J. Weiland, statement 2599
True Companies, Casper, Wyo., statement 2609
United States Telephone Association, John Sodolski, statement 2618
Vucanovich, Hon. Barbara F., a Representative in Congress from the State
of Nevada, statement 2623
Combined Listing by Name and Organizations (Raisers)
Able, Edward H., Jr., American Association of Museums, letter 2436
Alliance Exchange Group, Inc., Santa Ana, Calif., Deanna F. Burton, letter .... 2498
Alliance for Justice, Nan Aron and Carol Siefert, letter and attachment 2431
American Association of Museums, Edward H. Able, Jr., letter 2436
American Bankers Association, statement 2525
American Electronics Association, statement 2529
American Equity Exchange, Inc., Dillon, Mont., Max A. Hansen, letter 2499
American Federation of Labor and Congress of Industrial Organizations, Rob-
ert E. Lucore, statement 2325
American Forest and Paper Association:
Statement and attacnment 2399
Statement 2533
American Gas Association, statement 2535
American Greyhound Track Operators Association, Henry C. Cashen and
John C. DiU, statement 2544
American Horse Council, Inc., statement 2546
American Land Title Association, Ann vom Eigen:
Statement 2447
Statement 2500
American Petroleum Institute, statement 2551
American Trucking Associations, Inc., statement 2560
Anstrom, Decker, National Cable Television Association, statement 2381
Aron, Nan, Alliance for Justice, letter and attachment 2431
Arthur Andersen & Co., Andre P. Fogarasi and Richard A. Gordon, state-
ment 2329
Asociacion de Exportadores De Chile (Chilean Exporter's Association), Ronald
S. Bown F., letter and attachment 2402
Association of British Insurers, statement 2339
XXX
Page
Association of Home Appliance Manufacturers, statement 2407
Attorneys' Liability Assurance Society, Inc., John E. Chapoton and Thomas
A. Stout, Jr., letter 2345
Baily, Edward A., Carrier Corp., Syracuse, N.Y,, letter 2409
Barth, James P., North Bend, Ohio, letter 2243
Belding, David, Nevada Resort Association:
Statement 2287
Statement 2378
Statement 2458
BUbray, Hon. James H., a Representative in Congress from the State of
Nevada, statement 2563
Bishop, Barbara, Pasedena, Calif., letter 2502
Black Entertainment Television, Robert L. Johnson, letter 2244
Blum, Jared O., Polyisocyanurate Insulation Manufacturers Association,
statement 2412
Bowling, Richard P., Truck Trailer Manufacturers Association, letter 2398
Bown F., Ronald S., Asociacion de Exportadores De Chile (Chilean Exporter's
Association), letter and attachment 2402
Brown, Paul S., Risk and Insurance Management Society, Inc., letter 2374
Bryan, Hon. Richard, a United States Senator from the State of Nevada,
statement 2564
Building and Construction Trades Department, AFL-CIO, Robert A. Georgine,
statement 2463
Burt, R.L., Southampton, Mass., letter 2566
Burton, Deanna F., Alliance Exchange Group, Inc., Santa Ana, Calif., letter ... 2498
Business Roundtable, statement 2233
Carrier Corp., Syracuse, N.Y., Edward A. Baily, letter 2409
Cashen, Henry C, American Greyhound Track Operators Association, state-
ment 2544
Casterline, James C, Real Estate Exchange, Inc., Portland, Ore., letter 2510
Center for International Environmental Law, Robert F. Housman, statement . 2294
Center for Non-Profit Corporations, Princeton, N.J., Linda M. Czipo, letter 2438
Center for the Study of Commercialism, Michael F. Jacobson, letter 2245
Centex Corp., Dallas, Tex., Richard C. Harvey, letter 2567
Cetylite Inaustries, Inc., Pennsauken, N.J., Stanley L. Wachman, statement .. 2410
Chapoton, John E., Attorneys' Liability Assurance Society, Inc., letter 2345
Cherry, Mark, Mack Trucks, Inc., statement and attachments 2388
Christianson, Kathleen A., Fidelty Federal Bank, Glendale, Calif., letter 2267
Coal Tax Committee, statement 2240
Coalition for Independent Contractors, Edward N. Delaney and Russell A.
Holb-ah, statement 2469
Coalition on Interest Disallowance, statement 2455
Coopers & Lybrand, Washington, D.C., statement 2284
Customs Science Services, Inc., Kensington, Md., Robert J. Grain, letter 2283
Cutrone, Roseann M., Export Source Coalition, statement and attachments .... 2299
Czipo, Linda M., Center for Non-Profit Corporations, Princeton, N.J., letter .... 2438
Danaher Corp., Washington, D.C., James H. Ditkoff:
Letter 2249
Letter 2337
Delaney, Edward N., Coalition for Independent Contractors, statement 2469
Dill, John C, American Greyhound Track Operators Association, statement ... 2544
Ditkoff, James H., Danaher Corp., Washington, D.C.:
Letter 2249
Letter 2337
Dunagan, Daryl, National Conference of State Social Security Administrators,
letter 2587
Duncan, Harley T., Federation of Tax Administrators, statement and attach-
ment 2449
Edwin L. Cox Co., Dallas, Tex., J. Oliver McGonigle, letter 2251
Environcol, James C. Godbout, Diane Hemdon, and Mary Frances Pearson,
statement 2513
Equity Advantage, Inc., Salem, Ore., Lonnie C. Nielson, Thomas N. Moore,
and David S. Moore, letter 2503
Equity Reserve, Inc., Newport Beach, Calif., Frank C. Huntsman, letter 2504
Export Source Coalition, Paul W. Oosterhuis and Roseann M. Cutrone, state-
ment and attachments 2299
Famham, Thomas G., SeaWest, San Diego, Calif., letter 2290
XXXI
Page
Federation of Exchange Accommodators, Newport Beach, Calif., Andrew G.
Potter, letter 2505
Federation of Tax Administrators, Harley T. Duncan, statement and attach-
ment 2449
Fidelty Federal Bank, Glendale, Calif., Kathleen A. Christiansen, letter 2267
Fisher, John J., Barrineton, 111., letter 2252
Fogarasi, Andre P., Artnur Andersen & Co., statement 2329
Food Marketing Institute, and International Mass Retail Association, joint
statement 2253
Forrester, James E., National Association of Enrolled Agents, statement 2580
Georgine, Robert A., Building and Construction Traifes Department, AFL-
CIO, statement 2463
Giusti, Steve, Laser Graphics, Inc., Hillside, 111., letter 2279
Godbout, James C, Environcol, statement 2513
Gomola, Gary R., Coughlin & Gomola, Middletown, Conn., letter 2453
Good, James L., National Association of Water Companies, statement 2274
Gordanier, Dean C, Jr., National Venture Capital Association, letter 2440
Gordon, Richard A., Arthur Andersen & Co., statement 2329
Guttman, Steven J., International Council of Shopping Centers, statement 2507
Hansen, Max A., American Equity Exchange, Inc., Dillon, Mont., letter 2499
Harvey, Richard C, Centex Corp., Dallas, Tex., letter 2567
Hass, Michael J., National Association of Insurance Brokers, letter 2364
Healey, Maureen A., Society of the Plastics Industry, Inc., letters and attach-
ments 2416
Hemdon, Diane, Environcol, statement 2513
HoUrah, Russell A., Coalition for Independent Contractors, statement 2469
Housman, Robert F., Center for International Environmental Law, statement 2294
Hulen, MjTX)n, Colorado State University; William Kinny, Portland State
University; Jack Robison, California Polytechnic State University; and Mi-
chael Vaughan, Colorado State University, joint statement 2474
Huntsman, Frank C, Equity Reserve, Inc., Newport Beach, Calif., letter 2504
Independent Bankers Association of America, statement 2568
Independent Fuel Terminal Operators Association, statement and attach-
ment 2518
International Council of Shopping Centers, Steven J. Guttman, statement 2507
International Mass Retail Association, and Food Marketing Institute, joint
statement 2253
International Tax Policy Forum, Joel Slemrod, statement and attachment 2309
Jacobson, Michael F., Center for the Study of Commercialism, letter 2245
Johnson, Robert L., Black Entertainment Television, letter 2244
Kastner, Michael E., National Truck Equipment Association, letter and at-
tachment 2396
Kennelly, Hon. Barbara B., a Representative in Congress from the State
of Connecticut, letter and attachments 2350
Kiefler-Nolde, Chicago, Bl., Neil J. Schecter, letter 2278
Kinny, William, Portland State University, joint statement (see listing for
Myron Hulen)
KPMG Peat Marwick, statement 2268
Kraut, Jeffrey B., Swavelle/Mill Creek Fabrics, New York, N.Y., letter 2282
Lackritz, Marc E., Securities Industry Association, statement 2320
Lantos, Hon. Tom, a Representative in Congress from the State of California,
statement 1379
Larsen, Bryant & Porter, CPA's, P.C, Lincoln, Neb., Brent L. Stehlik, letter .. 2570
Laser Graphics, Inc., Hillside, Bl., Steve Giusti, letter 2279
Lawson, Richard L., National Coal Association, statement 2237
Lear, Jeffrey A., National Society of Public Accountants, statement 2235
Levenson, Daniel D., Lourie & Cutler, P.C, Boston, Mass., statement 2461
Lucore, ELobert E., American Federation of Labor and Congress of Industrial
Organizations, statement 2325
Lynd, Robert D., National Interfratemitv Conference, joint statement and
attachment (see listing for National Panhellenic Conference)
Macht, Harriett B., National Panhellenic Conference, joint statement and
attachment 2426
Mack Trucks, Inc., Mark Cherry, statement and attachments 2388
Mattel, Inc., statement 2255
McGonigle, J. Oliver, Edwin L. Cox Co., Dallas, Tex., letter 2251
Miles Inc., Pittsburgh, Pa., Helge H. Wehmeier, letter 2257
Moore, David S., Equity Advantage, Inc., Salem, Ore., letter 2503
XXXII
Page
Moore, Thomas N., Eguity Advantage, Inc., Salem, Ore., letter 2503
National Association for the Self-Employed, Bennie L. Thayer, letter 2573
National Association of Convenience Stores, statement 2576
National Association of Enrolled Agents, James E. Forrester, statement 2580
National Association of Insurance Brokers, Michael J. Hass, letter 2364
National Association of Realtors, statement 2583
National Association of Water Companies, James L. Good, statement 2274
National Cable Television Association, Decker Anstrom, statement 2381
National Club Association, statement 2423
National Coal Association, Richard L. Lawson, statement 2237
National Conference of State Social Security Administrators, Daryl Dunagan,
letter 2587
National Federation of Independent Business, statement 2482
National Panhellenic Conference, Harriett B. Macht; National Pan-Hellenic
Council, Inc., Daisy Wood; and National Interfratemity Conference, Robert
D. Lynd, joint statement and attachment 2426
National Petroleum Refiners Association, Urvan R. Stemfels, letter 2298
National Society of Public Accountants, Leroy A. Strubberg, and Jeffrey A.
Lear, statement 2235
National Truck Equipment Association, Michael E. Kastner, letter and at-
tachment 2396
National Venture Capital Association, Dean C. Gordanier, Jr., letter 2440
Nevada Resort Association, David Belding:
Statement 2287
Statement 2378
Statement 2458
New York Gas Group, Donald F. Straetz, statement 2523
Newspaper Association of America, statement 2382
Nielson, Lonnie C, Equity Advantage, Inc., Salem, Ore., letter 2503
Oosterhuis, Paul W., Export Source Coalition, statement and attachments 2299
Organization for International Investment Inc., Alexander Spitzer, statement
and attachments 2589
Pabst, Walter C, Techtron Imaging Centre, Chicago, HI., letter 2281
Patterson, William R., Stratford Technologies, Inc., Somerdale, N.J., letter 2490
Paul, William F., United Technologies, letter 2316
Pearson, Mary Frances, Environcol, statement 2513
Polyisocyanurate Insulation Manufacturers Association, Jared O. Blum, state-
ment 2412
Potter, Andrew G., Federation of Exchange Accommodators, Newport Beach,
Calif., letter 2505
Public Securities Association, statement 2318
Ralston Purina Co., Ronald B. Weinel, statement and attachments 2258
Real Estate Exchange, Inc., Portland, Ore., James C. Casterline, letter 2510
Reid, Hon. Harry, a United States Senator from the State of Nevada:
Statement 2291
Statement 2597
Reinsurance Association of America, statement 2366
Renewable Fuels Association, Eric Vaughn, statement 2383
Retail Tax Committee of Common Interest, statement 2263
Risk and Insurance Management Society, Inc., Paul S. Brown, letter 2374
Robison, Jack, California Polytechnic State University, joint statement (see
listing for Myron Hulen)
Schecter, Neil J., Kieffer-Nolde, Chicago, 111., letter 2278
SeaWest, San Diego, Calif., Thomas G. Famham, letter 2290
Securities Industry Association, Marc E. Lackritz, statement 2320
Security Trust Co., San Diego, Calif., J. Paul Spring, letter 2512
Shays, Hon. Christopher, a Representative in Congress from the State of
Connecticut, statement 1382
Siefert, Carol, Alliance for Justice, letter and attachment 2431
Slemrod, Joel, International Tax Policy Forum, statement and attachment 2309
Society of the Plastics Industry, Inc., Maureen A. Healey, letters and attach-
ments 2416
Sodolski, John, United States Telephone Association, statement 2618
Spitzer, Alexander, Organization for International Investment Inc., statement
and attachments 2589
Spring, J. Paul, Security Trust Co., San Diego, Calif., letter 2512
Stehl&, Brent L., Ursen, Bryant &. Porter, CPA's, P.C, Lincoln, Neb., letter . 2570
Stemfels, Urvan R., National Petroleum Refiners Association, letter 2298
XXXIII
Page
Stout, Thomaa A., Jr., Attorneys' Liability Assurance Society, Inc., letter 2345
Straetz, Donald F., New York Gas Group, statement 2523
Stratford Technologies, Inc., Somerdale, NJ., William R. Patterson, letter 2490
Strubberc, Leroy A., National Society of Public Accountants, statement 2235
Studds, Hon. Gerry E., a Representative in Congress from the State of Massa-
chusetts, statement 2497
Sundquist, Hon. Don, a Represeiitative in Congress from the State of
Tennessee:
Statement 2266
Statement 2280
Swavelle/Mill Creek Fabrics, New York, N.Y., Jeffrey B. Kraut, letter 2282
Tax Executives Institute, Inc., Ralph J. Weiland, statement 2599
Techtron Ima^ng Centre, Chicago, 111., Walter C. Pabst, letter 2281
Thayer, Bennie L., National Association for the Self-Employed, letter 2573
Thompson, Michael C, Whirlpool Corp., statement 2421
Truck Trailer Manufacturers Association, Richard P. Bowling, letter 2398
True Companies, Casper, Wyo., statement 2609
United Brotherhood of Carpenters and Joiners of America, AFL#-CIO, state-
ment 2492
United States Council for International Business:
Statement 2312
Statement 2324
United States Telephone Association, John Sodolski, statement 2618
United Technologies, William F. Paul, letter 2316
Vaughan, Michael, Colorado State University, joint statement (see listing
for Myron Hulen)
Vaughn, Eric, Renewable Fuels Association, statement 2383
vom Eigen, Ann, American Land Title Association, statement 2500
Vucanovich, Hon. Barbara F., a Representative in Congress from the State
of Nevada, statement 2623
Wachman, Stanley L., Cetylite Industries, Inc., Pennsauken, NJ., statement . 2410
Wehmeier, Helge H., Miles Inc., Pittsburgh, Pa., letter 2257
Weiland, Ralph J., Tax Executives Institute, Inc., statement 2599
Weinel, Ronald B., Ralston Purina Co., statement and attachments 2258
Whirlpool Corp., Michael C. Thompson, statement 2421
Wood, Daisy, National Pan-Hellenic Council, Inc., joint statement and attach-
ment (see listing for National Panhellenic Conference)
77-130 0 -94 -2
MISCELLANEOUS REVENUE ISSUES
WEDNESDAY, SEPTEMBER 8, 1993
House of Representatives,
Committee on Ways and Means,
Subcommittee on Select Revenue Measures,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:05 a.m., in room
1100, Longworth House Office Building, Hon. Charles B. Rangel
(chairman of the subcommittee) presiding.
Chairman Rangel. Good morning.
The Subcommittee on Select Revenue Measures will resume its
series of hearings on miscellaneous revenue issues. Earlier this
year, we conducted four hearings focused on these matters. All of
those were the revenue-losing issues. We will consider additional
testimony today on other miscellaneous items. This time we will
concentrate on those issues that raise revenue.
As those of you who are familiar with the committee are aware,
Chairman Rostenkowski and our committee have a strong commit-
ment to deficit reduction and responsible fiscal policv. In keeping
with long tradition, any miscellaneous issue that the committee
brings up, the member must offset it by an appropriate revenue-
raising item. So we have to do both, raise the issue and find out
how we are going to pay for it. Those suggested revenue raisers
will be the subject of today's hearing and again on September 21
we will review or return to this issue.
We will hear from public witnesses in the following areas: the al-
ternative minimum tax, accounting, financial institution costs, re-
covery pass-through entities, individual taxes, natural resources
issue, and tax-exempt entities. On the second day of the hearings,
Treasury is expected to testify on these issues, which will be Sep-
tember 21.
At this point, I would like to recognize the ranking member of
the subcommittee, Mel Hancock for whatever opening remarks he
has to make.
Mr. Hancock. Thank you, Mr. Chairman.
Today we will hear testimony from a wide variety of witnesses
on a number of revenue-raising proposals before this subcommittee.
As you remember, the committee spent several weeks this summer
considering the revenue-losing provisions which constituted the
easv part of the miscellaneous tax bill's journey through the Ways
and Means Committee.
Many items discussed in the previous hearings made good sense
and many should be enacted into law, but when you look at the list
of revenue raisers we have before us today, and the additional
(1055)
1056
items we will discuss later this month, one has to ask: Do the bene-
fits derived fi-om this process outweigh the burdens placed on indi-
viduals and businesses through the so-called revenue-raising off-
sets?
One merely has to look at this list of offsets to see that the bur-
den on individuals and business will be great, in my opinion much
greater than any benefits provided through this process. What is
worse, these new tax proposals come 1 month after the President
signed into law a new massive tax plan, which will affect nearly
every individual and business in this country.
The effects of this process appear to be just as grave. Not only
will these numerous provisions increase direct costs to individuals
and businesses, the cost of complying with these complicated pro-
posals could be astoundingly high. Limiting deductions, lengthen-
ing recovery periods, and stretching out amortization schedules are
the methods of choice in raising this revenue.
Few of these proposals contain the characteristics of sound tax
policy, and several make no sense at all. Many were conceived with
no concern for their effect on those who will be impacted, but mere-
ly as a means to finance other provisions of the bill. In these times
of slow economic growth and on the heels of the largest tax in-
crease in history, we should not seriously be considering the items
before us today.
While at first glance the items we will explore today may seem
minor, let me assure you, Mr. Chairman, they are very important
to those who will be affected and could hold disastrous economic
consequences. I think it is some sort of dichotomy that yesterday
the Vice President released an administration proposal to reinvent
Government through consolidation and simplification. Now here we
are today.
I encourage my colleagues on this panel to listen carefully to the
witnesses who will testify before us, many of whom have already
sacrificed under the President's tax bill. At the end of this long day,
it should be clear to all that the burdens mandated through this
process outweigh any benefits which may exist.
Mr. Chairman, this is the first day back from a vacation and I
wish we had held this up for a few more days because this is not
something I want to address this quickly after a pleasant 30 days
away from here. I know it has to be done, but let's seriously con-
sider what we are doing and consider the impact that this is going
to have on the people who are going to end up paying these addi-
tional taxes.
Chairman Rangel. If your district had the problems that my dis-
trict had, you would recognize the vacation starts today for me. I
am glad to be back here.
Does anyone seek recognition?
We have a panel before us led by Hon. Walter Tucker concerning
a project that the committee is anxious to hear about in the sov-
ereign State of California. We welcome all members of the delega-
tion.
Ms. Allard is here. Mr. Horn is here. Ms. Waters is expected, and
Congress woman Harman is here. As others arrive, they will be
recognized.
1057
STATEMENT OF HON. WALTER R. TUCKER HI, A REPRESENTA-
TIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Tucker. Thank you, Mr. Chairman and distinguished mem-
bers of the committee.
Again thank you for hearing us today and recognizing this dele-
gation that is concerned about alternative financing for a project
called the Alameda Corridor. Before I give background on the Ala-
meda Corridor, I would like to have entered into the record a for-
mal statement which I will extrapolate from.
Chairman Rangel. Without objection.
Mr. Tucker. Thank you, Mr. Chairman.
I believe members of the committee do have a packet and com-
prised within the packet is also a map, which may be of use to
them in following some of my commentary about the overall make-
up of what is called the Alameda Corridor Project. This project was
initiated by the Alameda Corridor Transportation Authority com-
prised of local communities stretching from downtown L.A. to the
port of Los Angeles and the port of Long Beach, a 20-mile stretch.
Those two ports combined comprise the largest port facility in
the country and the third largest in the world. They generate 100
million tons annuallv and they are obviously a very great source
of exportation over tne Pacific Rim which, as we heard during the
campaign, is the most prodigious source of exports for this country.
This particular project came about as a result of a concern to
consolidate and a concern to become more efficient. There are cur-
rently three separate railroads using four different routes to move
cargo between downtown L.A. and the ports, resulting in inefficien-
cies and environmental problems.
The additional cost to shippers, who must put up with delays in
transportation and transshipment of cargo destined for the East
Coast and other points, is becoming difficult to justify. Even as we
speak, there are reports about a possible construction of a port in
Mexico in the Baja Peninsula, which would create some kind of
competition for the ports of Los Angeles and Long Beach.
In light of a lot of impending discussions and negotiations on
NAFTA, this may or may not bring such competition to fruition.
We are trying to come up with alternative financing to better the
facilities at the ports of Los Angeles and Long Beach; in other
words, the Alameda Corridor. The issue is a question of how we
can possibly come up with tax-exempt bond financing.
In IRS Code section 142(c), there is language as to the ability to
have tax-exempt bond financing for ports and docks and wharves
including airports. Our submission to this distinguished committee
is that that particular code section be amended to include transpor-
tation and port-related facilities, such as the Alameda Corridor not
exclusive to the Alameda Corridor, but certainly exemplary of the
Alameda Corridor.
We believe that this is a natural extension, physical, legal and
practical of the port and thereby not in any way thwarting or un-
dermining the intent of the law, the intent of the code as written.
For that reason, we believe that such an amendment should be
made.
Mind you, even as the chairman indicated about the economic
problems all over the country, we understand that in New York, in
1058
New Jersey, and other parts of the country, port facilities are also
undergoing expansion and progress, whether they are on our time-
table or not. Such amendment we believe would be advantageous
and beneficial to such projects throughout the whole country, not
exclusive just to California. But as it relates to statistics as to Cali-
fornia, we can share with you at this point that the projection is
that 700,000 more jobs would be created in California by the year
2020. ^^^^^^
Of course, some people have said-as California goes, so goes the
country. But the importance of this particular project is that it has
national implications inasmuch as we are talking about the better-
ment and enhancement of trade on a national basis. Once again,
the project will consolidate rail traffic and the total project would
be estimated to cost $1.8 billion. We have looked at and you will
see in our written statement, we have looked at the possibility of
highway funds.
We have looked at the possibility of funds by the different ports;
in fact, the ports have already put up hundreds of millions of dol-
lars for the betterment of this project, $400 million contribution to
be specific. Eight million dollars is expected from other local, State
and Federal sources. There remains a $600 million shortfall and
this is why we are coming to this committee to look at it these al-
ternative sources.
The language of the proposed agreement to the Internal Revenue
Code would permit the issuance of tax-exempt bonds by the Ala-
meda Corridor Transportation Authority for the purpose of upgrad-
ing the 20-mile consolidated rail and highway corridor that we say
is an extension of the physical port itself Once again, this Alameda
Corridor Transportation Authority, that we call ACTA, is a public
entity and therefore a public entity will in fact own the corridor au-
thority and in fact then come within the governmental guidelines,
if you will, of the IRS 142(c) language.
The language of the amendment is entirely consistent with the
public policy underlying the ability to issue tax-exempt bonds to fi-
nance ports because it covers only facilities that are integral to op-
erations of the ports and dedicated to those operations.
I might also add that this project has received national support
from the American Association of Port Authorities. This project has
also received bipartisan support from Republicans and Democrats
alike. I might cite a dear colleague letter that is included in the
packet that has just about every signature of the members of the
California delegation, crossing all party lines.
In summary, Mr. Chairman and members of the committee, we
would ask that you look very closely at this. We understand that
there have been numbers projected that this might cost $115 mil-
lion over 5 years, but that our share would be measurably less
than that.
I am sure that one of the first questions that you will raise is
how will we pay for this. I am sure your committee is in the busi-
ness of working out those kinds of details. But we are here today
to get the ball rolling initially to say that this is a project of na-
tional and international import and hopefully export too, and that
we believe that it is important to get this going now to look at al-
1059
temative financial and financing sources and we believe the tax-
exempt bond financing would be one of the best ways to do it.
Let me add, I am joined by another distinguished member of the
California delegation, Ms. Waters. We want to welcome her as part
of this delegation.
At this time, I would like to turn it over to Congresswoman
Lucille Roybal-Allard.
[The prepared statement and attachments follow:]
1060
(CoxiQxt^i of tfje Winitth ^tatt^
J^oviie of iRcpregcntatibeff
3Ba£f)tng:ton. BC 20515
Written Testimony of
The Honorable Walter R. Tucker III
The Honorable Steve Horn
The Honorable Lucille Roybal-Allard
The Honorable Maxine Waters
The Honorable Jane Harman
The Honorable Xavier Becerra
Before the Subconunittee on Select Revenue Measures
Conunittee on Ways and Means
September 8, 1993
Good morning, Mr. Chairman, and Members of the Committee. We are
here today in support of a proposed amendment to Section 142(c) of
the Internal Revenue Code to allow exempt facility bonds to be
issued for certain transportation facilities (including trackage
and rail facilities) used for the transport of cargo or passengers
mainly to or from airports, docks, or wharves, regardless of
whether the facilities meet the governmental ownership requirement
of Code section 142(b)(1).
While the proposed amendment could potentially affect projects
around the Country, we would like to address its significance to a
specific project with which we are very familiar -- the Alameda
Transportation Corridor. This 20 mile corridor passes through our
districts as it runs from downtown Los Angeles to the San Pedro
Bay Ports, the largest port complex in the United States.
We have attached for the record a report that outlines the full
scope of this project. However, we would like to tell you just
enough about it to demonstrate why the amendment has national
significance even if it were to apply to this project alone.
The Alameda Corridor Project
The Alameda Corridor Project was initiated by the Alameda Corridor
Transportation Authority and an EIR funded by the Authority was
certified January 14 of this year. The objective of the project
is to consolidate rail traffic along the Alameda Street route that
extends from the main rail yards in downtown Los Angeles to the
two ports of Los Angeles and Long Beach. Currently, three
separate railroads use four different routes to move their cargo
between downtown and the ports. The inefficiencies and
environmental problems associated with the current practice is
unacceptable not only to the people who live and work in this area
but to the competitive position of the United States in World
markets. The additional cost to shippers who must put up with
delays in the transhipment of cargo destined for the East Coast
and other points is becoming increasingly difficult to justify and
there are already reports that Mexico is hoping to attract foreign
1061
capital to the Baja Peninsula for the purpose of constructing a
port to compete with the San Pedro Bay Ports.
Currently, cargo volumes through the port complex amount to
roughly 100 million tons annually, and in a study completed by the
U.S. Army Corps of Engineers on behalf of the two ports, these
totals are projected to double by the year 2020. Indeed a new
coal shipping agreement signed just recently opens the way to
dramatically increase the flow of U.S. coal through the ports to
Japan in the short term.
Mr. Chairman, we must make the surface transportation systems
serving our ports competitive if we are to protect our foreign
trade status in the World economy. At the same time we have to be
mindful of the impact these systems have on the local communities
and work to make them compatible with their surrounding
communities. In the case of the consolidation of the three
railroads on the Alameda corridor, 90 miles of tracks crossing 198
roads at grade level and having a direct impact on 71,000 people
whose residences are within 500 feet of the rail line would be
reduced to 20 miles of track, with zero grade crossings and
directly affecting only 7,900 people whose residences are within
500 feet of the line. These are dramatic improvements that will
significantly improve the efficiency of the ports and the quality
of life for the people who live, work and travel the Alameda
Corridor. As a demonstration of the broad support for the Alameda
Corridor Project, we have attached a letter signed by 46 Members
of the California Congressional Delegation supporting a request
for federal funding.
Tax-Exempt Bond Eligibility
Under current law (section 142 of the Code) dock and wharf
facilities are eligible for tax-exempt financing. Though the
facilities generally must be included in the public port's
jurisdiction, they are not limited solely to the actual dock or
wharf facilities but include facilities which are functionally
related and subordinate to the dock or wharf. Nevertheless, the
Authority has been advised by legal counsel that rail facilities
to transport cargo into and out of a port, even though dedicated
to handling public port cargo, are not a dock or wharf or
functionally related and subordinate to it. Therefore, a rail and
highway corridor project such as the Alameda Corridor Project does
not appear to be eligible for tax-exempt financing at this time.
Our legal counsel has further determined that the language of the
proposed amendment to the Internal Revenue Code would permit the
issuance of tax-exempt bonds by the Alameda Corridor
Transportation Authority for the purpose of upgrading the 20 mile
consolidated rail and highway corridor. We feel that the language
of the amendment is entirely consistent with the public policy
underlying the ability to issue tax-exempt bonds to finance ports
because it covers only facilities that are integral to the
operations of the ports and dedicated to those operations; under
the amendment 80 percent of the utilization of the project must be
directly connected to port activity. Consequently, we are asking
1062
that your Committee, Mr. Chairman, adopt the proposed sunendment
thereby setting in motion one of the most significant intermodal
transportation projects in the Country.
Project Funding Plan
Mr. Chairman, the total cost of the Corridor consolidation and
upgrading has been set at $1.8 billion. Already the San Pedro Bay
Ports have committed $400 million toward the right-of-way
acquisition and project construction. The Metropolitan
Transportation Authority has just recently committed $8 million in
local sales tax dollars for engineering. In addition to these
local commitments, four of the grade crossings on the corridor
were authorized for partial federal funding under the Intermodal
Surface Transportation and Efficiency Act (ISTEA).
Local, state and federal highway funds will be used to fund $800
million in highway improvements and grade crossings along the
corridor. While not all such funding can be identified in the
current five year local funding cycle or ISTEA authorization, we
are confident that subsequent extensions of ISTEA authorization
will provide the federal funding that we feel is appropriate for
this project. Indeed there is a very good chance that the highway
segment of the Alameda Corridor Project will be included in the
National Highway System when Congress completes its review in
1995. Once included we are relatively assured that the project
can be completed by our target date of the year 2000.
Nevertheless, even with the Ports' $400 million contribution and
the $800 million expected from other local. State and federal
sources, there remains a $600 million shortfall. The State of
California has given the Alameda Corridor Transportation Authority
the ability to issue bonds for the purpose of improving the rail
and highway corridor. The Authority is prepared to take such
action, but Mr. Chairman, it desperately needs authority to issue
tax-exempt bonds.
Consequently, we have come before this Committee to support an
amendment that would give the Authority the ability to issue these
bonds, which would be repaid from port and corridor user charges
and fees.
Mr. Chairman, you have be^n most generous in taking our proposal
under consideration, and in your deliberations on this tax bill we
think you will find that the merits of our position are
compelling. Indeed, we feel that this project can become a
national model that demonstrates the willingness of all levels of
government to work in concert toward a mutual goal with truly
global economic significance.
1063
llameda Corridor Update
On Januaiy 14, 1993, the Goveniing Board of the Alameda Coiridor Transportation Authority
(ACTA) certified the I^nal Environmental Impact Repoit and foimally adopted the Alameda
Corridor project Hie action, which was unanimous, signifies a strong regional consensus that Ae
Alameda Coiridor should be built. Approximatdy 20 miles in length, the project is designed to
facilitate rail and highway access to the ports of Los Angeles and Long Beach, while mitigating
potentially adverse impacts of the ports' growth, including highway traffic congestion, air pollution,
vehicle delays at grade crossings, and noise in residential areas.
Railroad Component
The goal of the railroad component of the Alameda Corridor is to consolidate the movements of the
Union Pacific, Sanu Fe, and Southern Pacific Railroads onto an unproved right-of-way parallel to
Alameda Street South of Route 9 1 the railroad impro vanents will be at-grade with east-west grade
separations. Between Route 9 1 and 25th Street the raUway will be depressed, with the tracks in a
trench, 33 feet deep and 47 feet wide. East-west streets will bndge straight across this trench.
Highway Component
South of Route 91:
The Ports Access Demonstrauon Project (PADP), the first phase of the Alameda Corridor, will
widen Heniy Ford Avenue and Alameda Street from four to six lanes between the Tenninal Island
Freeway and Route 9 1 . The PADP also includes east-west grade separations at Camsn Street and
DelAjHoBoukvanL
The PADP has been funded with federal giants in 1982, 1987, and 1 99 1 . The Intenooodal Surface
Transportation Efficiency Act (ISTEA) includes additional funds for grade separations at Pacific
Coast Highway, Squitveda Boulevard, Anaheim Street, and Alameda Street near Laurel Park Road.
Funding for a freeway interchange at the intersection of the Terminal Island Freeway and Ocean
Boulevard is also included in the legislation.
1064
Qiameda Corridor Update
North of Route 91:
Alameda Street, from the Artesia Freeway (SR 91) to the Santa Monica Freeway (I-IO), will be
reconstructed with the existing number of through lanes, thus maintaining little Alameda Street on
the east side of the railroad tracks and main Alameda Street on die west side of the tracks. This
would include alternative traffic engineering solutions, such as left turn pockets alongmain Alameda
Street and new signahzation at all existing crossings. No light-of-way would be taken along the cast
or west side of Alameda Street that would result in acquisition of buildings or create a non-
conforming use.
The project will cost about $1.8 billion in inflated dollars.
Railroad Agreements
On August 18, 1993 the Port of Los Angeles terminated the agreement with Southern Pacific to
purchase the property needed for the Alameda Corridor. The Port of Long Beach withdrew from
the agreement on Septanber 1, 1993. The ports have reaffirmed their suppon for the project, but
have stated that more time is needed to resolve issues of title and clean-up of hazardous materials
along the corridor. An operating agreement with all three railroad companies has also not been
completed. All parties are woiking diligently to resolve tte remaining issues.
Financing
To date, approximately S535 million has been committed for the project from federal, state, local
and port sources. Remaining funds will come from future government grants, revenue bonds
supported by the users of Ae coiridor, and other sources. Depending on the availabQity of funds,
the project may be constructed in phases. The goal, however, is to complete the project by the year
2000.
m
1065
liameda Corridor Update
Benefits of the Project
Increased Economic Activity
■ The Alameda Coihdor will allow the poits of Los Angeles and Long Beach to
expand. Port growth is expected to generate 700,000 more jobs throughout Southem
California by the year 2020.
■ Because of improved access along the Comdor, redevelopment opportunities will
be enhanced.
■ The Alameda Corridor project itself will generate about 10,000 construction-related
jobs in the central Los Angeles area.
■ The corridor traverses several communities that were hit hard by the recent civil
unrest. The project is an important element in the effort to rebuild Los Angeles.
Aedoced Freeway Congestion/Improved Freeway Safety
■ The Alameda Comdor will facilitate the development of near-dock and on-dock rail
systems, reducmg truck traffic on firccways and improving roadway safety.
■ The Alameda Corridor will divert truck traffic to Alameda Street, which will further
reduce truck traffic on the freeways.
Reduced Noise and Traffic Delays
■ The project will result in an estimated 90 percent reduction m tram-related noise in
residential areas.
■ The Alameda Comdor will lead to a 90 percem reduction in train-related traffic
delays, eliminating some 14,000 vehicle hours of delay by the year 2020, due to the
rerouting of trains and elimination of grade crossmgs.
.Q
1066
llameda Corridor Update
Improved Railroad Operations
a The project wiU result in an esdmaied 30 p»canreductuHi in train operating hours,
and a 75 percent reliction in the number of times trains have to stop for other trains
to pass. (Stopped trains cause severe traffic tie-ups on streets)
■ Train speeds will increase from 10-20 miles per hour to 30-40 miles per hour.
Improved Air Quality
■ Smoother flowing freeways and a reduction in truck traffic will reduce vehicular
The reducti<» in traffic delays at grade crossings will fijother reduce emissions.
Railroad emissions (mostly NOx) will be reduced by 28%.
The project increases the feasibility for eleccification of the rail lines, which will
also reduce *^rp^yvoT|.s.
For addicional information, please call or wnce
Gill Hicks. General Manager
Alameda Corridor Transpornacion Auchorlcy
6550 Miles Avenue, Room I I 3
Huntington Park. CA 90255
(213)583-3080
.a
1067
The Alameda Corridor
1068
WALTER R. TUCKER. IM
PUBLIC WORKS *H0 thanspobtahom
COMMITTU ON SMALL BUSINtSS
(EongreHS of ttie United ^otes
KouBc of SepreHentatiuea
9aBt}{nglan. BCH 20315
May 28, 1993
Honorable Bob Can-
Chairman, House Appropriations
Subcommittee on Transportation
Dear Mr.
We are writing to request a $10 million appropriation from your subcommittee for FY
1994 for the Alameda Corridor. These funds, in combination with $16 million in local and
state funding, would be committed to preliminary engineering, program management, and
final design woric for the Corridor. The Alameda Corridor Transportation Authority has
completed work on the subcommittee's funding criteria.
The Alameda Corridor concept will be a new, state-of-the-art, and world-class truck and
rail seaport access transportation line, stretching some 20 miles from the Los Angeles/Long
Beach port complex to rail yards in East Los Angeles. As you know, the combined port
complex of Los Angeles and Long Beach is the largest in the nation and the third largest
in the world. Its Customs District is the largest customs contributor in the nation, with
annual revenue exceeding $4 billion. An estimated 363,000 Jobs depend on the Ports'
activity.
As you know, both ports are now engaged hi ambitious expansion activities hi order to
fuUill the identified capacity needs of tiie 21st Century. Yet, the Ports must have a i
to move cargo efficiently in and out of the port complex if the benefits of the (
activities are to be realhed. Simply put, the largest port complex in the nation i
on the successful construction and operation of the Alameda Corridor if they
continue to fuUiQ their role of economic engines for the region and for the nation.
The Alameda Corridor has the bacUng of Governor Pete Wilson, Senator Dianne
Feinstein, Senator Barbara Boxer, The California Transportation Commission, the Ports
of Los Angeles and L<»g Beach, the Southern California Association of Govemmoits, the
Los Angeles County Transportation Commission, and numerous tocal and state oRIdals.
Federal investments in the Alameda Corridor will have substantial returns. Esthnated
annual customs revenue after completion of the port expansion projects Is esthnated to be
$12 billion by the year 2020. WhOe the Ports and tiie State of California are both
committed to providing substantial funds for the Corridor, federal help is necessary to
bring tiliis project to fruition. We can thmk of few other projects which wOl nilflll the
faitermodal visioa of the Inteimodal Surface Transportation EfBdency Act of 1991. We
hope your subcommittee can support the Alameda Corridor. Fhially, we would like to
extend an invitatioa to you to come and visit the Corridor personally so that you can see
the need for, and potemHal of, this critical transportation line.
1069
We thank you for your time and consideration of tliis request.
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1071
1072
STATEMENT OF HON. LUCILLE ROYBAL-ALLARD, A
REPRESENTATIVE IN CONGRESS FROM THE STATE OF
CALIFORNIA
Ms. Roybal-Allard. Thank you, Mr. Chairman, for the oppor-
tunity to appear before you today in support of granting tax-exempt
bond status to the Alameda Corridor Project. This project will have
significant economic benefits for both the country and the southern
California region. I recently had the opportunity to fly over the
project site with Secretary Pena. Viewing the project from that
vantage point clearly illustrated how the project will link the two
ports of Los Angeles and Long Beach, improve their transportation
infrastructure and create the Nation's largest seaport complex.
National economic benefits will be delivered to the Congress that
can be scored by the CBO. Accordingly, the national importance of
this project must be underscored. The two ports currently handle
about 100 million metric tons of goods annually for shipment
throughout the Nation. The expansion in port capacity generated
by the project will significantly improve both port access and cargo
transportation.
This is not simply a regional project. It represents an effort to
maintain our Nation's trade competitiveness in the face of in-
creased competition from Mexico and other international ports. The
project's surface transportation system improvements are needed to
keep our ports competitive in the world economy.
The economic development benefits from this project on a local
level are considerable as well. Cargo volume for the ports is pro-
jected to reach 210 million tons by the year 2020. This growth will
generate 700,000 jobs throughout southern California and over 2
million nationally. The project will also generate approximately
10,000 construction jobs in the Los Angeles area and help to revi-
talize the local economy.
California has always served as a weather vane for the rest of
the country. The entire Nation will benefit through the improved
economy of California. The project will also have important envi-
ronmental benefits by reducing traffic congestion and air pollution.
Presently three railroad companies use four different tracks cross-
ing at grade level, thereby directly impacting thousands of resi-
dents living within 500 feet of those lines.
The Alameda Corridor Project will reduce the number of tracks
to a single major line with zero grade crossings and dramatically
mitigate their impact upon local residents. The project will reduce
train-related noise in residential areas by 90 percent and signifi-
cantly reduce truck traffic on local freeways. The rail transpor-
tation system will be streamlined and made more cost-effective
through a large reduction in train operating hours.
The Alameda Corridor Project will promote local, regional and
national economic development in transportation planning. Tax-
exempt bond status is critical to the continued construction of the
project. We must not lose this opportunity to improve our transpor-
tation infrastructure and trade competitiveness.
Thank you.
Mr. Tucker. Thank you, Mr. Chairman.
Any questions for Ms. Allard?
1073
Chairman Rangel. We would like to hear from the entire panel,
and if there are questions, anyone can decide who would respond.
Mr. Tucker. Thank you, Mr. Chairman.
At this time I will turn it over to Congresswoman Harman.
STATEMENT OF HON. JANE HARMAN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA
Ms. Harman. Thank you, Mr. Chairman and thank you, Mr.
Hancock, for permitting us all to testify on a bipartisan basis.
I am the designated lawyer on this committee who will address
in a little more detail the tax-exempt financing questions. I hope
if you have questions for me, you will refer them to my colleagues
first.
Let me underscore several points which have already been made.
First of all, the Alameda Corridor will be publicly owned by the
Corridor Authority.
Second, 80 percent or more of the use of the corridor will be for
the port. We want to make sure the committee understands this in
connection with our request for tax-exempt financing. We have
been advised by legal counsel that rail facilities to transport cargo
into and out of a port, even though dedicated to handling public
port cargo, are not a dock or wharf or functionally related and sub-
ordinate to it. It is for this reason that we are seeking the amend-
ment, because we believe that what we have is not eligible for tax-
exempt financing at this time. Should that opinion be different, we
would be very happy, but we believe it cannot be different.
The language of the proposed amendment to the Internal Reve-
nue Code would permit the issuance of tax-exempt bonds by the Al-
ameda Corridor Transportation Authority, ACTA, a public author-
ity for the purpose of upgrading the 20-mile consolidated rail and
highway corridor.
Under the amendment, 80 percent of the utilization of the project
must be directly connected to port activities. Let me point out tnat
this is not a California amendment. This is a generic amendment
and it could potentially affect projects around the country. It is
supported by the American Association of Port Authorities for this
reason and we understand that they will be submitting a statement
in support for the record.
Points have already been made about the national significance of
this. This is the largest port complex in the United States even as
it stands today. There is no real alternative on the West Coast for
entry and exit of goods and the real alternative on the West Coast,
if we don't permit upgrading in some reasonable way in the short
term, will be Mexico. Then we will be building Mexican jobs rather
than American jobs, not just in California, but as these goods come
in and out all across the United States and specifically benefiting
many of our East Coast ports.
I am looking at you, Mr, Chairman, thinking about the ports of
New York and New Jersey, which can logically be an entry and exit
point for the same goods we are talking about entering and exiting
this new expanded facility. Tax-exempt financing will permit reve-
nue-raising of a piece of the $1.8 billion that we need for this ex-
pansion. It will build jobs across the United States and enable us
effectively to compete with what we expect will be an expanded and
1074
very, very dangerous competitor to our south in Mexico in terms of
denying U.S. jobs and building jobs in another country.
Thank you.
Let me add one thing. Mr. Hancock asked: "Do the benefits de-
rived outweigh the burdens?" I want to answer that with a re-
sounding yes.
Mr. Tucker. Thank you.
Also let me add, Mr. Chairman, onto that aspect of her presen-
tation, that $224 million in savings would occur with tax-exempt
financing as opposed with taxable bonds over 30 years on this
project.
I would like to turn it over now to Congressman Steve Horn.
STATEMENT OF HON. STEPHEN HORN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Horn. Thank you very much.
As has been noted by several witnesses, this is a national project.
It is generic for other future projects. I think the committee should
know that right now the ports of Los Angeles and Long Beach gen-
erate $1 billion in terms of revenue in terms of customs and by the
year 2020, which is the end of the overall port plan for both ports,
there will be roughly $5 billion in revenue coming into the Federal
Treasury.
This is the major access point for trade from and to Asia, and
this is also going to do a lot to improve the lives of thousands of
citizens along these train tracks. It brings together three railroads
in one corridor that go transcontinental and cover every one of the
States now represented on this committee so that they can go right
up to take the containers off the ships and eliminate most of the
truck traffic except for regional southern California.
In terms of the total financing of the project, the total cost is esti-
mated at $1.8 billion. The two ports, the port of Long Beach and
the port of Los Angeles, the so-called San Pedro Bay ports, have
committed $400 million toward right-of-way acquisition and project
construction. The Metropolitan Transportation Authority of the re-
gion, Los Angeles County primarily, has committed $8 million in
local sales tax dollars for engineering. Four of the 35 grade cross-
ings on the corridor have already been authorized in the Inter-
modal Surface Transportation and Efficiency Act, which the Con-
gress approved last year. The local, State and Federal highway
funds will be used to fund $800 million in highway improvements
and grade crossings along the corridor, and that will improve the
lives of roughly 60,000 to 70,000 citizens where the traffic disrupts
their lives.
Although not all the funding has been identified yet in the high-
way sector because some might be in future bills passed by the
Congress, there is a very good chance that the highway segment
will be included in the national highway system when Congress
completes that review in 1995.
Even with the $400 million contribution of the ports, the $800
million and more expected from local. State and Federal sources,
there remains that $600 million shortfall. That is why the delega-
tion— and you have in the official filing of our testimony a letter
I believe signed by 48 of the 52 members of the delegation — is ask-
1075
ing for this generic authority with which we could issue tax-exempt
bonds which would be retired based on the fees collected by the
board from the rail and the truck traffic that will be going in and
out of the port.
So we hope that you will grant that to the authority, the ability
to issue tax-exempt bonds that would be repaid over the next sev-
eral decades.
I would now like to ask my colleague Maxine Waters to wrap up
the discussion.
STATEMENT OF HON. MAXINE WATERS, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF CALIFORNIA
Ms. Waters. Thank you very much.
I am extremely pleased to join my southern California colleagues
at this hearing to speak on behalf of the Alameda Corridor Project.
The Alameda Corridor Project, if fully funded and constructed,
promises to be an efficient, productive, and resourceful addition to
the entire southern California economy.
While the benefits of this program would be regional indeed, na-
tional in scope, they would be a direct link to my own congressional
district, the 35th Congressional District. The project would run
through my congressional district at two points, following Alameda
Street between Jefferson Boulevard and Slawson Boulevard and
again on Alameda between 79th and 91st Streets.
In these areas the Alameda Corridor would substantially im-
prove the living conditions of many of my constituents, who cur-
rently live within 500 feet of the 3 operating rail lines. This would
be true all along the corridor and would affect literally thousands
of southern California residents.
In my brief presentation, I would like to focus on the economic
impact of the project in southern California. By way of background,
it is important to talk about the state of the southern California
economy overall. The State of California is mired in a 3-year reces-
sion which has already cost 800,000 jobs. Military downsizing and
other global economic factors have taken a disproportionate toll in
California and in our region in particular. The overall unemploy-
ment in the State still is over 10 percent and worse along the cor-
ridor, leaving 1.4 million people out of work. In many parts of
southern California that would be touched by the Alameda Cor-
ridor, unemployment rates are indeed much, much higher.
Since 1989, Los Angeles County has lost 40,000 high-tech manu-
facturing jobs due to military downsizing. This translates into $1.5
billion in lost wages in the county.
It is against this backdrop that we approach the huge economic
and competitive potential of the Alameda Corridor Project. First,
construction of the Alameda Corridor alone will generate an esti-
mated 10,000 jobs in the central Los Angeles area. The improved
efficiency of the new corridor will dramatically expand import op-
portunities by the entire region, a region that is threatened by
tough economic competition from Mexico. This could lead to hun-
dreds of thousands of new jobs, up to 700,000 by the year 2020, ac-
cording to some estimates.
1076
The benefits fi'om the increased use of the Long Beach and Los
Angeles ports would lead to expanded development opportunities as
weU.
Finally, the area is trying desperately to rebuild. We stand to
gain enormously from the Alameda Corridor Project, as it would
cut through some of the most economically deprived sections of L.A.
County.
In conclusion, Mr. Chairman and members, the proposed Ala-
meda Corridor Project can work. All we need is a simple change in
the tax law to get the program off the ground. I hope you and this
committee will help us realize the enormous economic potential of
this very worthwhile program.
Thank you very much, Mr. Chairman.
Mr. Tucker. I believe that concludes our presentation, Mr.
Chairman.
Chairman Rangel. Thank you.
Where is this project? Is this a State-operated project? Will the
State be in charge? This is a subdivision of the State government
that is going to operate the
Mr. Tucker. It is operated by the Alameda Corridor Transpor-
tation Authority, which is a body that has been given jurisdiction
on a local basis, but it derives from the State, yes.
Chairman Rangel. So they are private sector people who are on
the board?
Mr. Tucker. The corridor is comprised of the local communities;
if you look at the map, communities like Compton and Lynwood.
Chairman Rangel. Who would issue the bonds?
Mr. Tucker. I believe that the corridor, the Transportation Au-
thority would do it.
Chairman Rangel. How much has been invested in this project
approximately?
Mr. Tucker. How much has been invested already?
Chairman Rangel. Already.
Mr. Tucker. Let me find out how many hundreds of millions
have been invested. Over $100 million has been invested already
in demonstration projects such as overpasses and underpasses.
Chairman Rangel. Was the investment made with the hope that
tax-exempt bonds would be made available?
Mr. Tucker. The investment was made at the time with highway
funds and they anticipated, I believe, that they would have enougn
to complete the project, but I think that they did anticipate at the
same time that tax-exempt bonds would have to come in to assist
at some point in time.
Chairman Rangel. But they are private investment funds in the
project? It is all not publicly funded, is it?
Mr. Tucker. Yes, there are private investment funds in the
project by way of the railroad, Southern Pacific and others.
Chairman Rangel. Why did they choose to make this generic
and not a specific exemption for this particular project?
Mr. Tucker. I believe, Mr. Chairman, that even though we could
maybe lay claim to the fact that we have special interests here,
that we believe that in the long run or in the aggregate picture,
as we indicated earlier, there may be other port facilities that
might benefit from that language generically. I can defer as to that.
1077
Ms. Harman. I wanted to add that we understand that other
ports are learning from this whole concept of a transportation cor-
ridor and we would think it unwise for the committee to limit this
possibility just to this very important West Coast port. If, for exam-
f>le, the ports of New York and New Jersey wanted to build a simi-
ar transportation corridor and have part of the financing come
from tax-exempt bonds, we would think it logical given the need in
California for a similar facility to be able to be put together on the
East Coast.
Chairman Rangel. The budget people have an illogical way in
which they score this. This would be considered a revenue loss even
though no revenue would be generated if the bonds didn't issue; so
therefore it would be more diflficult to determine how much this
would cost if it is generic.
Mr. Horn. Could I comment that this is a natural extension of
the docks and wharves provision, as I am sure you know, and we
wouldn't be opposed to a particular designation for it, but I think
it makes sense that some of the major ports in the United States
might wish to access such authority to do a similar thing, combine
transportation corridors so you would get more rapid service, much
more efficient lower cost domestically across all your States than
the now system of both ship, truck to connector rail lines.
Chairman Rangel. Since this is a national, or indeed has inter-
national implications, how far up in the administration do you have
support for this?
Mr. Tucker. Well, we have support for this, Mr. Chairman, from
the Secretary of Transportation. We have support from the Sec-
retary of Commerce. I have spoken with the President about it. So
we have an extreme amount of support for it.
Mr. Horn. I might add on that point that when Secretary Pefia
visited there, he said the corridor is not only a California issue, it
is a national priority.
Chairman Rangel. I would think that is a bit more than persua-
sive.
Does any member seek recognition?
Mr. Camp.
Mr. Camp. Thank you, Mr. Chairman.
Ms. Harman, this doesn't change the bond volume cap, does it?
Ms. Harman. It doesn't change the cap. My understanding is
that as defined this way, this would not be part of that cap. This
would just be an extension to an existing exemption for docks and
wharves and it would make it apply to tnis logical transportation,
20-mile transportation corridor that comes directly off the dock.
Mr. Camp. Has Joint Tax issued a revenue estimate on this
project?
Ms. Harman. That is the one we have been talking about, the
$115 million figure. As we have been discussing with the chairman,
it is for all the projects, not just the Alameda Corridor Project. We
believe our portion of that is $35 million.
As the chairman discussed, he wants to know what the rest of
it is. We have felt that making this a generic amendment would
be more logical in public policy terms. As Mr. Horn said, we would
not resist the committee deciding it should just apply to this
project, but we think it makes more sense to apply it generically.
1078
Mr. Camp. Was there a policy reason behind saying that a rail-
road that goes to a port is not functionally related to the port? Was
it because private interests were involved in the railroad? I am con-
fused as to why the ruling came down the way it did, making this
legislation necessary,
Ms. Harman. I would assume we could make the ruling available
to the committee. There is no specific — this is the IRS position, and
I think it is derived from a kind of common sense concept of what
a port is, that 20-mile extension of some kind of a transportation
corridor is not a port. We think it is in terms of conceptually under-
standing what is the purpose of the port as an entry and exit point
for goods.
Obviously, the consolidation of the rail and other systems into
this port will make this an efficient port and able to compete with
Mexico. Similarly other important U.S. ports could do the same
thing, those that are impacted by traffic and noise, et cetera.
We feel therefore that the United States would be in a much bet-
ter position in terms of international trade, and this is in every-
one's interest, for a very, very modest cost.
Mr. Camp. Thank you.
Your comments have been very helpful and I look forward to
working with you on this.
Chairman Rangel. Mr. Payne.
Mr. Payne. I think that what you are proposing has important
and positive public policy implications. I was on the Public Works
Committee last year as we wrote the Intermodal Surface Transpor-
tation and Efficiency Act. You are proposing putting into practice
what we were attempting to look at in that bill in terms of a blue-
print for the Nation of intermodality and how various modes of
transportation could best work together in order to produce the
most efficient system and one that would help us compete with
other nations aroimd the world.
So I think this is a very important proposal that you are making
and one that deserves very serious consideration.
Thank you.
Chairman Rangel. Mr. Kopetski.
Mr. Kopetski. I think this is creative financing. My question has
to do with profits and whether the railroads are saying that this
is the only way that they can make this go is for Government to
subsidize this corridor, that they wouldn't make money off of it un-
less Government stepped in and financed this capital project.
Mr. Horn. Could I comment? This is not about profits for rail-
roads. I grew up in the Hiram Johnson tradition of being against
big railroads in California. This is about congestion in the south-
land of L.A. County and Orange County and clogging up the free-
ways and not being able to readily deliver products given the unbe-
lievable expansion that is going to take place in the next three dec-
ades at these port facilities.
The idea is to — ^that won't decrease traffic very much. We would
like it to stay where it is because trucks will still need the regional
southern California delivery. But if you are going to move produce
through that port by containers or into the Midwest, into the
Northwest, into the South, even into Mexico, then we need to get
moving from the dock side. It goes straight from the ship into the
1079
train and away by train. It solves a lot of pollution and a lot of peo-
ple problems and would be a more efficient operation simply on
congestion.
Mr. KoPETSKi. So the railroads are not going to make any money
on this?
Mr. Horn. We are trying to buy out the railroads. The ports are
doing this. The two ports have agreed to do that. There are now
three separate lines going into the port, Santa Fe, Union Pacific,
and Southern Pacific. The best corridor for getting the traffic into
where it is assembled to move east and north and south is to take
this Alameda Corridor, 22 miles long, which is owned by Southern
Pacific Railroad. The ports are going to buy them out, and it is just
a matter of agreeing on the price, and the railroads will pay a fee
to use this corridor. It is not a freebie for them. It brings them
dockside in the port of Los Angeles, the port of Long Beach, and
all three will be using this one corridor.
Mr. KOPETSKI. Thank you, Mr. Chairman.
Chairman Rangel. It certainly sounds like an exciting project
and it would have impact on our trade policy. I would think the
administration might even be able to identify similar projects that
could work in an overall national trade policy, and as all of you
know, if this came as a part of an administration package to us,
they would be able to find it much easier to pay for it since we
have to hurt people, industries, and other projects in order to bring
about this balance.
In any event, I would encourage you to work with the adminis-
tration and to get as much support as they can give it since this
committee tries not only to write good tax policy, but also to try
to avoid conflict with the administration as well when that is pos-
sible. So it sounds like a national project with international impli-
cations, and I think it should be raised to that level since it has
definitely regional support.
I thank you for the time that you have spent with us today.
Mr. Tucker. Thank you very much, Mr. Chairman. We look for-
ward to giving you and your subcommittee more information and
even letters of support from the administration on the project.
Thank you, again.
Chairman Rangel. Thank you.
[The information follows:]
STEPHEN HORN
1080
€onqxtii o! tte iHniteb S^tatti
J^ovat of iElepretfentatibeii
nadijington. SC 20515
September 28, 1993
The Honorable Charles B. Rangel
Chainnan
Select Revenue Measures Subcommittee
Committee On Ways and Means
1105 Longworth
Washington, D.C., 20515
Dear Mr. Chairman:
Thank you for the opportunity to testify before your subcommittee Wednesday,
September 8.
I hope we were able to effectively communicate the importance of the Alameda
Corridor not only to the Southern California region, but also to the nation. The critical
bottleneck to the growth of the Long Beach - Los Angeles port complex is land-side access.
If cargo cannot move efficiently in and out of the ports through the tremendous congestion
of the Los Angeles region, then all expansion activities will be for naught. The answer to
this problem is the Alameda Corridor.
In response to your question regarding Administration support for the Corridor, I
have attached an article from the September 2, 1993 Journal of Commerce entitled, "Pena
Pledges Federal Help For Alameda Corridor. " I would also like to correct a figure I gave
with regard to the amount of Customs revenue the combined Ports generate. I was mistaken
when I stated at the hearing that the current annual revenue is approximately $1 billion. In
fact, current combined Customs revenue is more than $3 billion per year. With the 2020
expansion plans, Customs receipts are expected to grow to $8 billion per year. Clearly, the
federal stake in this investment is more than substantial. Tax-exempt bond authority would
seem a small down payment in view of the returns.
Again, thank you for the opportunity to appear before your subcommittee. If I may
answer any ibrther questions you have on the Alameda Corridor, please do not hesitate to
With kindest regards.
Sincerely yours,
]u
STEPHEN HORN
Member of Congress
1081
THE JOURNAL OF COMMERCE — THURSDAY. SEPTEMBER 2. 1993
Pena Pledges Federal Help
For Alam^a Corridor
By KEVIN a HALL
Jeonul M Canmicm Su«t
LOS ANGELES - Touring
Southern CaUlomU port*. Tranapor-
tatioo Secretary Kederico Pena hai
pledged the federal govenuneflc will
play a greater role in th* develop-
menc at the nation's largest iocer-
modal infrastructure proJecL
Mr. Pena toured the ports of Los
Aogeles and
Long Beach this
week to get a
belter under-
standing of bow
tntemaodal imio-
vatioas have
made the twin
waierfroat fnclH-
ties t&e nation's
largest contaLn-
erpoR cocnpiex.
The secretary
alao flew over p^NA
the pro- .. ^
posed Alameda Corridor, a planned
S1.8 Rulllon consolidated truck and
rail corridor from the ports to rail-
yards in t&e ea^t part of sprawling
Los Angeles.
The corridor b being planned in
an effort to relieve expected mas-
sive congestion a.^sodaf/ai with th«
predicted doubling of cargo moving
through the bustling ports by Uw
year 2020. ,.,,., ..-.o^. ■■'. i.'^ .-■•
• Project backers like Geraldine
Knatz. planning director at tj» Port
.of Long. Beach, used the helicopter
flight and visit with the secretary to
sell the benefits the project will
yield to the federal govemtnenL -
' Among the benefits, she said. Is
that the project wtU allow for In-
creased freight movements worth
billjoas amiually to the VS. Customs
Service.., :.,.; _;; ... ; ^^... ;;:,;.■. .\..
"They're (Customs receipts) going
to grow by another JS.2 bluioo,* said
Ms. Rnata, noting receipts are ex-
pected to grow from $3 billion amiu- '
ally to w bilUon. •.'.-;"■•:,? ^■/r^'"
The growth In Customs receipts
will eclipse Che $1.2 bllUon funding
shortfall that now e^dsts for the
project, a shortfall that represents!
only 23% of the expected receipts. ■
Although the plan was dealt a
major setback last month when the
Port of Los Angeles backed out oi
its share of a $260 million purchase
of trackage needed for the project,
the Idea remains viable and the sec-
retary said he came to g« a first-
hand look at the project.
Two of Mr. Pena's predecessors
«;ere also familiar with the massive
incermodal project but did little to
rally federal funding, which to date
remains at roughly W tnillioo of '
tlte iHi million in secured commit< '
mants.
' Saying he hoped to "to be the '
last" transportation secretary to -
deal with the Intermodal project.
Mi-. Pena said once the ports have '
concluded their track-purchase
agreement with Southern PacUlc ',
Lines, the federal government will ■
step up its role. '.
'We'll have a definitive state- '
ment about the need from the feder- :
al government in terms of oor
contribution," the secretary said '.
dudng an Interview on the docio of '
American Pre*ldent Lines' terminal .
in Los Angeles. "Once we have that
(hen we go to work and begin to
decide where we can get those dol- •"
laxa to make the Alameda Corridor
a reality.' ' ..
Added Richard Mlnti, Mr. Pena's ,'
spokesman. "I think you're going to '
see additiooa! federal commitments "
down the road." ' -~ ■-'^ •-,••.--? ~' -■:.;"
- Separately,' Mr, Pena banded "
over a $49.6 million check to expand
the city's Metro Red Line subway. -:
saying the project will help rebuild ;
California's struggling economy. :',';,'
The mone^ will be used to contin- '
ue construction q{ the WUshire Cor- '
ridor segment, which follows''
Wilshire Boulevard from the West-."
lake area to Hollywood. .'-'.. ^i ''•.:'■■
■ The J1.6 billion subway, already ■
In operation downtown, is scheduled •
for completion In IMS. -..\s:j.-r, ."•.>„'
• -T;hi3 Is the largest federal In- ^
vestment in any transit agency In.*
this nation^'Mr. Pena said. <.V.i;/n--'-
1082
Chairman Rangel. The next panel consists of the Association of
Christian Schools International, John Holmes, director of govern-
ment affairs; the PHH Corp. in Maryland, Samuel Wright, vice
president and general counsel; the Independent Bakers Association,
Dale Cox, from San Raphael, Calif, accompanied by the chairman
of the Independents Contractors Committee, Robert Fanelli; Fred
Lazarus, vice president of the Association of Independent Colleges
of Art and Design, from Florida; and the University of Florida
Health Science Center, Stanley Rosenkranz, general counsel.
Because of the severe limitations on time that we have and the
large number of witnesses, the Chair would ask that the witnesses
restrict their oral testimony to 5 minutes with the understanding,
if there is no objection from the committee, that your full written
statements will be entered into the record.
The Chair, hearing no objections, will proceed with Dr. Holmes.
STATEMENT OF JOHN C. HOLMES, ED.D., DIRECTOR, GOVERN-
MENT AFFAIRS, ASSOCIATION OF CHRISTIAN SCHOOLS
INTERNATIONAL
Mr. Holmes. Good morning, Mr. Chairman, and members of the
committee. Thank you for this opportunity to speak concerning rev-
enue issue No. 8, which would restore fair treatment of lay-board
religious schools under the Federal Unemployment Tax Act.
With me today is Dr. Pauline Washington, who is an adminis-
trator and founder of the Washington-McLaughlin Christian School
in Takoma Park, Md. She is right over the Washington line. She
is right behind me. Also with me is Rabbi Abba Cohen, who is with
Agudath Israel of America, and also Curran Tiffany, attorney with
the National Association of Evangelicals.
ACSI serves over 3,000 schools. ACSI schools follow a policy of
racial nondiscrimination, reaffirming this policy annually. I come to
address the problem of unfair treatment and inequity within the
Tax Code concerning about 15 percent of our Christian schools, and
all of the Jewish day schools represented by Agudath Israel of
America. About 20 percent of all religious schools in America are
not owned or affiliated directly with the church. The schools we
seek to exempt from mandatory participation in the Federal Unem-
ployment Tax Act are as religious as church or synagogue-affiliated
schools.
Thev are denied equal treatment without anyone even suggesting
that they are not religious, but they are under the governance of
boards of religious laymen rather than clergy. Dr. Washington,
with me today, is an administrator of such a school. Because of this
distinction without difference, this small portion of religious schools
in America has been forced to participate in FUTA. The 50 States
could mandate participation in State unemployment laws, but the
majority of the States, 46, I believe, choose to mirror the Federal
statute which exempts church-related schools.
Issue 8, which is identical to Congressman Crane's H.R. 828,
would offer the same choice of participation in FUTA to lay-board
religious schools and alleviate the inequity faced by these schools
because of the technicality of control. For religious schools, their
faith is far more important than their organizational structure
whether or not they are affiliated with another religious body.
1083
Allow me to give a personal example of the double standard now
faced by religious schools not owned or affiliated with a church or
synagogue. I served as a superintendent of four Christian schools
in Southern California in the same area that they were talking
about this morning. The schools were operated by a church in Los
Angeles County. The school board discussed how the secondary
schools could serve a wider constituency of evangelical Christian
community if the junior highs and the high schools were not
viewed by the parents as a ministry of a particular church because
of doctrinal distinctions. A change of status seemed logical to the
board members and the sponsoring church officials shared this con-
cern and approved the legal separation of the two secondary
schools.
A board of laymen was formed and began to function as an inde-
pendent religious educational institution. The teachers were the
same, the chapel services were the same, the curriculum was the
same, the Bible classes were the same, everything except the rela-
tionship with the church remained the same, but the schools, con-
sidered too religious to be eligible for participation in various Fed-
eral and State funding sources, were no longer exempt from man-
datory participation in FUTA. This was a triumph of form over
substance. Issue 8 asks no more or less than what church schools
now have by virtue of section 3309(b)(1) of the Internal Revenue
Code of 1986, which relates to exemption. When the exemption sec-
tion was enacted. Congress exempted employees who worked in
churches and religious organizations operated by churches. Then in
1981 in St. Martin Evangelical Lutheran Church v. the State of
South Dakota, the U.S. Supreme Court ruled that the exemption
extended to elementary and secondary schools that churches oper-
ate.
Any religious school that receives exemption as a result of this
measure has established the fact with the Internal Revenue Service
that it operates primarily for religious purposes described in sec-
tion 501(c)(3) and is exempt from tax under the 501(a).
We believe that Congress inadvertently failed to exempt lay-
board controlled religious schools from FUTA because these schools
are not numerous and Congress was simply unaware of the dif-
ference and the technicalities of affiliation from other religious
schools.
Back in 1988 an identical amendment to Issue No. 8 was spon-
sored by Senator Strom Thurmond and it was unanimously adopt-
ed by tne Senate during consideration of the tax technical correc-
tions bill. Unfortunately, the amendment was dropped in con-
ference. This amendment was viewed by the Joint Committee on
Taxation as revenue neutral. The committee said that the net
budget effect of this bill would actually gain the Federal Govern-
ment less than $5 million in the fiscal year and negligible effect
each year thereafter. Therefore they viewed it as revenue neutral.
Thus there is no fiscal burden to the Government to provide tax
equity and simple justice.
1084
We urge this subcommittee to carefully consider this remedial
measure. Its passage would help lay-board religious schools, Catho-
lic, Jewish, and Protestant, which are helping American children
succeed morally, spiritually, and academically. Thank you for lis-
tening to our concerns.
Chairman Rangel. Thank you.
[The prepared statement follows:]
1085
Testimony of
Dr. John C. Holmes, Director for Government Affairs
Association of Christian Schools International
Concerning
MISCELLANEOUS REVENUE ISSUE #8
Before
Subcommittee on Select Revenue Measures,
Committee on Ways and Means,
U. S. House of Representatives
The Honorable Charles B. Rangel, Chairman
Septembers, 1993
Mr. Chairman and Members of the Subcommittee on
Select Revenue Measures:
Thank you for this opportunity to address you today
conceming Miscellaneous Revenue Issue #8, which would
restore fair treatment of lay-board religious schools which come
under the Federal Unemployment Tax Act. My name is Dr.
John Holmes and I serve here in Washington, DC as the
Association of Christian Schools Intemational's Director for
Government Affairs. With me today is Dr. Pauline Washington
who is the administrator and founder of the Washington-
McLaughlin Christian School in Takoma Park, Maryland.
The Association of Christian Schools Intemational is the
largest association of evangelical Christian schools in the nation
with over three thousand schools and colleges. We now serve
nearly 570,000 students. All ACSI schools follow a policy of
racial non-discrimination, re-affirming this policy on an annual
basis when they renew their membership. I come here today to
address a problem of unfair treatment and inequity within the
tax code concerning about three out of every twenty of our
member Christian schools and nearly all of the Jewish Day
Schools that are represented by Agudath Israel of America.
Approximately one out of every five religious schools in
America is dqI owned or affiliated with a particular church or
synagogue. The elementary and secondary schools we seek to
exempt from mandatory participation in the Federal Unemploy-
ment Tax Act are as pervasively religious as a church or syna-
gogue owned or affiliated schools would be. They are denied
77-130 0-94 -3
1086
equal treatment, without anyone even suggesting that they are
not religious, because they lack formal church affiliation and are
governed by boards of religious laymen. Dr. Washington is the
administrator of such a school.
Because of this distinction, without difference, this small
portion of religious schools in America has been forced to par-
ticipate in FUTA. On their own, the fifty states could make par-
ticipation in state unemployment laws mandatory. However, an
ovenwhelming majority of states choose to mirror the federal
statute, which exempts church related or affiliated elementary
and secondary religious schools. Miscellaneous Revenue
Issue #8, which I understand is identical to Congressman Phil
Crane's H. R. 828, would offer the same choice of participation
in FUTA to lay-board religious schools and alleviate the inequity
faced by these schools because of the technicality of control.
For religious schools, their faith is far more important than their
organizational structure, whether or not they are affiliated with
another religious body.
Allow me to give a personal example of the double stan-
dard now faced by religious schools which are not owned or
affiliated with a church or synagogue. Before coming to Wash-
ington, DC, I served as a superintendent of four evangelical
Christian schools in southem California. All of the schools were
operated under the umbrella of a church in Los Angeles
County. Much discussion by the evangelical school board
revolved around how our secondary schools could more ade-
quately sen/e a wider constituency of the evangelical Christian
community if the junior and senior high schools were not viewed
by parents as a ministry of a particular church, because of
doctrinal distinctives. Since the secondary schools sought to
meet the needs of the greater evangelical community and not
stress particular doctrinal distinctives, a change of status
seemed logical to a majority of the board members and church
officers.
The sponsoring church officials shared this concern and
approved the legal separation of the secondary schools. A
board of laymen was formed and began to function as an inde-
pendent religious educational institution. The teachers were the
same, the chapel services were the same, the curriculum was
the same, the Bible classes were the same-everything except
the relationship with the church remained the same. But the
schools, which were considered too religious to be eligible for
participation in various federal and state funding sources, were
no longer exempt from mandatory participation in federal
unemployment tax. This is a triumph of form over substance.
1087
Each of the states has slightly different ways of handling
unemployment tax, but approximately 46 states largely mirror
the federal code. The wording proposed in Miscellaneous Rev-
enue Issue #8 asks no more or less than what private religious
schools that are operated or affiliated with a church or syna-
gogue now have by virtue of Section 3309 (b)(1) of the Internal
Revenue Code of 1986, which relates to exemption. Back
when the exemption section was enacted. Congress exempted
employees who worked for churches and religious organiza-
tions operated by churches. Subsequently, in 1981 in St. Martin
Evangelical Lutheran Church v. South Dakota, the U. S.
Supreme Court ruled that the exemption extended to elemen-
tary and secondary schools that churches operate.
Any religious elementary or secondary school that would
receive exemption as a result of this measure would have
already established the fact with the Intemal Revenue Service
that it "operated primarily for religious purposes, which is
described in section 501(c)(3), and which is exempt from tax
under section 501 (a)."
Lay-board religious schools provide excellent education
and moral training for American young people with a caring
environment where students can achieve academically. My
own doctoral research in Los Angeles on why black, Hispanic
and white parents chose to send their children to evangelical
Christian schools attests to this fact. Parents of all ethnic back-
grounds chose to re-enroll their children because of the caring
environment that they found in evangelical Christian schools.
We believe that Congress failed to exempt lay-board con-
trolled religious schools from FUTA because these schools are
not numerous, and Congress was simply unaware of the differ-
ence in the technicalities of affiliation from other religious
schools. This oversight was not intentional discrimination on
Congress' part, merely inadvertent. Back in 1988, an identical
amendment to Miscellaneous Revenue Issue #8 was spon-
sored by Senator Strom Thunnond. The amendment was
unanimously adopted by the Senate during consideration of the
tax technical corrections bill. Unfortunately, the amendment
was dropped in conference. We do not know why. Amendment
No. 3443 (in the 100th Congress) was viewed by the Joint
Committee on Taxation as revenue neutral. The Joint Commit-
tee on Taxation said the "net budget effect of this bill would be
a gain of less than $5 million in the fiscal year. . .and a negligi-
ble effect each year thereafter." (Congressional Record, 100th
Congress, S14861-2) Thus, there is no fiscal burden to the
government to provide tax equity and simple justice.
1088
Groups that are supportive of Miscellaneous Revenue
Issue #8 include Agudath Israel of America, the American
Association of Christian Schools, Coalitions for America, Con-
cemed Women for America, the f^arian [Catholic] Secondary
Schools Association and the National Association of Evangeli-
cals. We urge this Sut>committee to carefully consider this
remedial measure. Its passage would help lay-board religious
schools which are helping American children succeed morally,
spiritually and academically.
Again, thank you for listening to our concerns.
1089
Chairman Rangel. Mr. Wright.
STATEMENT OF SAMUEL H. WRIGHT, VICE PRESIDENT AND
GENERAL COUNSEL; PHH CORP., HUNT VALLEY, MD.
Mr. Wright. Thank you, Mr. Chairman. I am vice president and
general counsel of PHH Corp. I am testifying on behalf of PHH and
the American Automotive Leasing Association, of which PHH is a
member. Our company leases and provides management services
for approximately 400,000 vehicles throughout North America.
AALA members lease and manage the majority of sales and serv-
ice vehicles used by businesses throughout our country, a market
that exceeds 3V2 million vehicles. We strongly support the proposal
to modify the computation of depreciation under the alternative
minimum tax by increasing the acceleration method from 150 per-
cent of declining balance to 200 percent. This proposal would go a
long way toward redressing unfair treatment accorded to these as-
sets under our tax system.
Passenger cars and trucks are allowed inadequate depreciation
deductions under both alternative and regular income tax. These
assets receive worse depreciation treatment than other business as-
sets. This discrimination artificially increases the actual cost of
these business assets, distorting business investment decisions, re-
ducing the number of passenger vehicles purchased. Prior to 1986
automobiles were depreciated over 3 years using a 200 percent de-
clining balance method. This provided a modest amount of incen-
tive depreciation, consistent with the regular tax depreciation.
Unfortunately, in 1986 Congress lengthened the writeoff period
to 5 years. This change removed all tax incentive for passenger
cars and light trucks from regular tax depreciation. The 1986 legis-
lation also included a corporate alternative minimum tax. Under
the AMT, depreciation deductions were intended to approximate
economic depreciation in the value of business assets. For business-
use passenger vehicles, this period was set at the same 5-year pe-
riod provided under the regular tax, but using a 150 percent declin-
ing balance method.
In 1989 Congress directed the Treasury Department to conduct
a study of the proper class life of cars and light trucks. In 1981 the
Treasury Department issued a report, which recommended a class
life of 3.5 years for business-use cars generally. They also con-
cluded that the actual useful life of cars in business fleets, the type
of vehicles I am talking about today, is 2.8 years. The 1991 report
is just the latest in a long line of Treasury determinations going
back over 50 years, concluding that cars should be depreciated over
a 3-year period. Shortening the regular tax recovery period for pas-
senger vehicles to 3 years to reflect the Treasury Department's re-
port would simply reinstate an incentive comparable to that ac-
corded other business assets.
As I mentioned earlier, the Treasury Department's 1991 study
concludes that the appropriate class life for business-use cars
should be 3.5 years, 2.8 years for fleet cars. Thus, in order to re-
flect real world depreciation, the cost recovery period under AMT
for cars should be no more than 3.5 years. The economic effect of
the proposal to increase the acceleration method for business-use
passenger vehicles from 150 to 200 percent is equivalent to short-
1090
ening the AMT recovery period from 5 to 4 years. Increasing the
acceleration method from 150 to 200 percent would therefore mere-
ly allow us to deduct amounts which reflect the actual decline in
the value of our business assets, nothing more.
I should mention that the recent repeal of the ACE a(Jjustment
for depreciation under AMT was a substantial simplification. How-
ever, repealing ACE did not provide business-use vehicles with eco-
nomic depreciation and did not remove the discrimination against
these assets as compared with other business assets.
In closing, I would like to emphasize the importance of this
change to the entire economy. More than 95 percent of business-
use cars are products of domestic manufacturers. Over 125,000
businesses have fleets of 10 or more automobiles. Business-use cars
also account for over one-third of all automobiles sold by domestic
manufacturers, over 3.5 million cars annually. Merely providing
these vehicles with depreciation rules, which reflect economic re-
ality, will increase sales and result in more economic growth and
more jobs not only in the automobile manufacturing industry, but
also in industries such as steel, glass, rubber, textiles, and semi-
conductors that supply the automobile manufacturers. Thank you,
Mr. Chairman, and the committee for your attention.
Chairman Rangel. Thank you, Mr. Wright.
[The prepared statement follows:]
1091
Statement of
Samuel H. Wright
American Automotive Leasing
Before
The Subcommittee on Select Revenue Measures
Committee on Ways and Means
United States House of Representatives
September 8, 1993
Mr. Chairman:
My name is Samuel H. Wright. I am the vice president and general counsel of
PHH Corporation which is located in Hunt Valley, Maryland. I am testifying on behalf of PHH
Corporation and the American Automotive Leasing Association of which PHH is a member.
PHH Corporation is a $4 billion company whose stock is traded on the New York
Stock Exchange. Through its subsidiary, PHH FleetAmerica, PHH Corporation leases and
provides management services for approximately 400,000 vehicles throughout North America.
AALA is composed of companies who lease and manage the majority of sales and service
vehicles used by businesses throughout our country, a market exceeding three and a half million
vehicles.
We want to thank you for giving us the opportunity to present our views of the
proposal to modify the computation of depreciation under the alternative minimum tax by
increasing the acceleration method from the 150 percent declining balance method applicable
under present law to a 200 percent declining balance method. This proposal would go a long
way toward redressing unfair treatment accorded to these assets under our tax system.
The problem we have under present law is simply that passenger cars and light
trucks are allowed inadequate depreciation deductions under both the alternative minimum tax
and the regular income tax. These assets receive worse depreciation treatment than other
business assets. This discrimination artificially increases the actual cost of these business assets,
distorting business investment decisions and reducing the number of passenger vehicles
purchased.
I am sure that it is difficult to understand how such an important part of our
economy such as the automobile industry and passenger vehicles used in business has come to
be treated so unfairly by our tax system. It may be helpful if I summarized some historical
background on this issue.
Background
Automobiles have traditionally been depreciated over three years using a 200
percent declining balance method under the regular tax. This provided a modest amount of
incentive depreciation consistent with the intent of regular tax depreciation. Unfortunately, in
1986, Congress lengthened the write-off period to five years, evidently based on a
misapprehension of the useful life of these vehicles. This removed all incentive from regular tax
depreciation.
The 1986 Tax Reform Act also included a corporate alternative minimum tax.
Under the AMT, depreciation deductions were intended to approximate economic depreciation
in the value of business assets, rather than to provide any incentive similar to that intended to
be provided for regular tax depreciation. As a result, most assets were to be depreciated over
a somewhat longer period using a ISO percent declining balance method. For business-use
passenger vehicles, this period was set at the same five-year period provided under the regular
tax, reflecting that the regular tax cost recovery period was longer than i4>pn^riate.
1092
Treasury Department Study
Since 1986, it has been made absolutely clear that business-use passenger vehicles
receive inadequate cost recovery treatment.
The Omnibus Budget Reconciliation Act of 1989 directed the Treasury Department
to conduct a study of the proper class life of cars and light trucks. The Treasury Department
issued a report in April, 1991, which recommended a class life of 3.S years for business-use
cars, and, in fact, concluded that the actual adjusted economic life for cars used in business fleets
is 2.8 years.
The 1991 Treasury Dqjartment rqx>rt is just the latest in a long line of Treasury
determinations that cars should be depreciated over a 3-year period. The earliest determination
was made in Bulletin F, an I.R.S. list of guideline lives for depreciable assets promulgated in
1942. In 1962, the Treasury Department issued new depreciation guidelines in Revenue
Procedure 62-21 and once again provided for a 3-year class life for automobiles. Finally, in
1971 , the Treasury Department issued new "asset depreciation range" ("ADR") guidelines which
were based on the 1962 guidelines, but allowed taxpayers to select a class life within a 20
percent range around the mid-point life. Cars were assigned a mid-point class life of 3 years.
Absent legislation to the contrary, an asset with a 3.S year class life would be
treated as three-year property for tax purposes. However, the 1986 Act specified that passenger
cars placed in service after December 31, 1986, and before January 1, 1992, were to be
classified as five-year property. After that period, the Treasury Department was given the
authority to reclassify cars and light trucks as i^ropriate.
Congressional Intent
It is important to highlight this point. When the cost recovery period for cars was
lengthened to five years. Congress intended that the five-year write-off period was to be required
only through 1991, presumably to balance revenues to the Treasury over that period. After
1991, the Treasury Department was given authority to reclassify cars as three-year property if
it deemed the shorter period to be appropriate based on economic useful life of the asset.
Unfortunately, in 1988, Congress enacted legislation that removed the Treasury
Department's authority to reclassify assets as appropriate. While that change was intended to
keep Treasury from lengthening cost recovery periods for certain assets without clear
Congressional direction, it had the effect of locking cars into an inappropriately long recovery
period.
Shortening the cost recovery period for passenger vehicles would not be an
incentive of some arbitrary amount, but would, rather, simply provide these assets with a cost
recovery period that accurately reflects their usefulness in business. Nevertheless, shortening the
cost recovery period to three years for business-use cars would also be one of the most effective
and targeted tax incentives that the GovCTnment could provide.
AMT Pgprggiation
The 1991 Treasury Dqurtment report also makes absolutely clear that a five-year
cost recovery period using the 150 percent declining balance method provides less than economic
depreciation. Nevertheless, under present law, taxpayers are forced to use this five-year period
for automobiles used in their business. This is absolutely contrary to the intent of the AMT to
tax no more than economic income. Simple fairness would require that AMT depreciation be
improved to reflect economic depreciation.
1093
As I mentioned earlier, the Treasury Department's 1991 study concludes that an
appropriate class life for business-use cars would be 3.5 years. Thus, the cost recovery period
for cars under the AMT should be no more than 3.5 years to reflect economic depreciation, not
the 5-year period provided under present law.
The economic effect of increasing the acceleration method for business-use
passenger vehicles from 150 percent to 200 percent declining balance is equivalent to shortening
the AMT cost recovery period for these assets from 5 years to 4 years. This would provide tax
depreciation no greater than an approximation of the economic depreciation in the value of the
assets.
I would like to thank the members of this committee for their efforts in repealing
the ACE adjustment for depreciation under the AMT. That change was a substantial
simplification. However, it is not an alternative to changing the acceleration method to 200
percent of the declining balance. Repealing the ACE adjustment did not provide business-use
vehicles with economic depreciation and did not remove the discrimination against these assets
as compared with other business assets.
We hope that, when you review requests for depreciation relief under the AMT,
you will ask whether relief requested would provide simply economic depreciation or whether
the requested relief would provide incentive depreciation. All we are asking is that we be
allowed to deduct amounts which reflect the actual decline in the value of business assets.
Increasing the acceleration method from 150 percent to 200 percent would accomplish this.
Economic Impact
In closing, I would like to emphasize the importance of this change to our
country's economic well-being. More than 95 percent of business-use cars are products of
domestic manufacturers. Over 125,000 businesses have fleets of ten or more automobiles.
Business-use cars also account for over one-third of all automobiles sold by domestic
manufacturers - over 3.5 million cars per year.
Improving tax depreciation deductions directly reduces the cost of a vehicle. It
is generally agreed in the industry that a reduction in price will result in an increase in sales of
an equal percentage. In the business context, the increase in sales will occur both because
businesses will operate more automobiles and because they will replace their fleets more often.
Thus, merely providing these vehicles with the depreciation rules which reflect
economic reality will increase sales and result in more economic growth and more jobs, not only
in automobile manufacturing directly, but also in industries such as steel, glass, rubber, textiles,
and semiconductors that supply the automobile manufacturers.
For this reason we strongly urge that you adopt the proposal to provide for the use
of 200 percent declining balance depreciation for passenger vehicles for alternative minimum tax
purposes. We believe that the cost recovery period for these assets under the regular tax should
also be reduced from five to three years, reflecting the results of the 1991 Treasury Department
study. However, if revenue constraints require deferral of this proposal, you can be certain that
the proposed change in AMT depreciation will have a real and important impact.
1094
Chairman Rangel, Independent Bakers, Dale Cox.
STATEMENT OF DALE COX, INDEPENDENT CONTRACTOR, SAN
RAPHAEL, CALIF., ON BEHALF OF THE INDEPENDENT
BAKERS ASSOCIATION; ACCOMPANIED BY ROBERT FANELLI,
CHAIRMAN, INDEPENDENT CONTRACTORS COMMITTEE
Mr. Cox. Thank you, Mr. Chairman. I am here today in support
of the proposal bv the baking industry for relief from the statutory
employee rule. The statutory employee rule could place special and
troublesome burdens on distributors of bakery products that essen-
tially are not imposed on any other industry in America.
A recerif change of interpretation of the statutory employee rule
by the IRS threatens to destroy an opportunity that was available
to me.
I would like to tell you a little bit about myself and what the op-
portunity to be an independent businessman has meant to me.
I was bom and raised in California. I don't have a college degree,
and with only a high school diploma spent the first decade of my
adult life working as an employee in a job which offered little fu-
ture beyond a weekly paycheck. In 1968, at the age of 31, I was
fortunate enough to come across the opportunity to purchase a
Pepperidge Farm Cookie territory in northern California for $5,000.
I was married and in those days $5,000 was an enormous
amount of money. Even so, my young wife and I were determined
to build a better life for our children and so, frightened to death,
we bought the territory.
I thrived as a bakery distributor entrepreneur. For the first time
in my life I was excited about my work, and while I routinely had
to work 60 or more hours a week, those were happy times. The
business was small and my resources smaller. My garage was my
warehouse and at busy times of the year cartons of cookie inven-
tory could be found in every nook and cranny of our home, where
the kids quickly discoverea that they could be stacked to make
great play forts. Needless to say, all of the kids in the neighborhood
wanted to play at our house.
The years of hard work and sacrifice paid off and my business
grew and grew. Today I have 19 employees and my $5,000 original
investment is worth well in excess of $1 million. It is a wonderful
thing to have that kind of financial security, but the greatest joy
for my wife and me has come from what it has enabled us to do
for our family.
Our son, Kussell, now 33, is active with me in the business and
we work closely together on a daily basis. That is a joy every father
should get to experience. Our daughter, Suzanne, who is 28, has
graduated from Oregon State University and Dominican College
with a teaching degree and is happily married to a good and able
husband. We have four grandchildren so far and look forward to
watching them grow and to being able to help them if they are ever
in need.
It is doubtful that I could ever have had all these blessings un-
less that bakery distributorship had come into my life. The ability
to act as my own boss, to market my products as I saw fit, and to
have a financial reward for my hard work was a tremendous incen-
tive. That incentive would have been lost if I were an employee.
1095
which is the Hkely result of applying the statutory employee rule
in the manner recently put forth by the IRS. In terms of my suc-
cess, that would have been tragic.
I understand that the matter of tax compliance generally is an
ongoing concern of Congress. I appreciate that concern. I can tell
you that in my years as a bakery distributor I have been careful
to discharge my responsibilities as a taxpayer under the law. I
want to assure the members of this subcommittee that if this pro-
posal is adopted, I and the baking industry stand ready to assist
the subcommittee to ensure compliance with the law.
I have attached to this written statement a copv of the statement
submitted on behalf of the Independent Bakers Association. I com-
pletely endorse the IBA statement and ask that it be included in
the record as part of my statement.
Thank you for the opportunity to appear here today and present
these remarks.
[The prepared statement and attachment follow:]
1096
STATEMENT ON BEHALF OF THE
INDEPENDENT BAKERS ASSOCIATION AND THE BAKERY INDUSTRY
IN SUPPORT OF THE PROPOSAL TO CLARIFY THE EMPLOYMENT
TAX STATUS OF DISTRIBUTORS OF BAKERY PRODUCTS
Hearings on Miscellaneous Revenue Issues
Subcoimnittee on Select Revenue Measures
House Ways and Means Committee
September 8, 1993
Chairman Rangel and Members of the Subcommittee:
The Independent Bakers Association appreciates the
opportunity to present its views and the views of the bakery
industry on the proposal by Congressman Sundquist to amend IRC
§ 3121(d) (3) (A) relating to the employment tax status of bakery
distributors. We would like to thank Mr. Sundquist for his
strong support for this proposal.
Description of the Issue
The issue before the Subcommittee is whether bakery
distributors should be classified by statute as employees for
employment tax purposes even though they may be treated as
independent contractors for income tax purposes. Our proposal
(which is attached to this statement as Exhibit 1) would delete
the phrase "bakery products," from section 3121(d)(3)(A) of the
Code. Section 3121(d)(3)(A) presently provides that certain
distributors, including bakery distributors, will under certain
circumstances be treated as employees for employment tax
purposes. -
We believe it is important to clarify for the
Subcommittee what this proposal will and will not do. The
proposal under consideration today does not seek to classify
-'section 3121(d)(3)(A) provides:
(d) EMPLOYEE. — For purposes of this chapter, the term
"employee" means —
(1) ...; or
(2) ...; or
(3) any individual (other than an individual who is an
employee under paragraph (1) or (2)) who performs services
for remuneration for any person —
(A) as an agent-driver or commission-driver engaged
in distributing meat products, vegetable products,
bakery products, beverages (other than milk) , or
laundry or dry-cleaning services, for his principal;
(B) .
(C) .
(D) .
if the contract of service contemplates that substantially
all of such services are to be performed personally by such
individual; except that an individual shall not be included
in the term "employee" under the provisions of this
paragraph if such individual has a substantial investment in
facilities used in connection with the performance of such
services (other than in facilities for transportation) , or
if the services are in the nature of a single transaction
not part of a continuing relationship with the person for
whom the services are performed; or
(4) ....
1097
bakery distributors as independent contractors.- Neither does
it seek to change in any way the common law test by which
individuals are classified as either employees or independent
contractors. The proposal would simply eliminate the
irrebuttable presumption that bakery distributors are employees
for employment tax purposes and would place them on the same
footing with other individuals by making distributors subject to
the same common law test for employment status as everyone else.
Section 3121(d) (3) (A) overrides the normal, common law
test for employment status; thus, even though a bakery
distributor would be treated as an independent contractor for
income tax purposes, if that person falls under section
3121(d)(3)(A), he or she will nevertheless be considered an
employee for employment tax purpose.- We contend that this
treatment as statutory employees is completely inappropriate in
light of the way in which the bakery industry is organized.
Classifying bakery distributors as statutory employees is
disruptive of sound business arrangements, is technically
unworkable, and serves no identifiable tax or retirement policy
goal. Current law discriminates against distributors by creating
an irrebuttable presumption that they are employees for
employment tax purposes even though they may be independent
contractors for income tax purposes.
History of the Statutory Emplovee Provision
Section 3121(d) (3) (A) was enacted in 1950, at a time
when the combined FICA tax rate for employees was higher than the
tax on self-employed individuals.- Section 3121(d)(3)(A) was
enacted as remedial legislation. Congress concluded that "the
usual common-law rules for determining the employer-employee
relationship [fell] short of covering certain individuals who
should be taxed at the employee rate under the old-age,
survivors, and disability insurance program."-' Congress
apparently concluded that it was important to secure for
distributors the higher Social Security benefits that would
accrue to them as a result of the higher tax rates.
While originally drafted to apply to house-to-house
sales persons, the language eventually enacted referred to
individuals distributing certain goods and services, such as
bakery, meat, vegetable and beverage products, and laundry and
dry cleaning services.- The statute excepted from its coverage
individuals who had a substantial investment in facilities used
-The announcement for today's hearing described the proposal as
one to "eliminate the rule treating distributors of bakery
products as statutory employees for purposes of Social Security
payroll taxation and coverage, and to treat such persons as
independent contractors." This is technically not correct.
While the proposal does eliminate the rule classifying bakery
distributors as statutory employees, it does not classify them as
independent contractors. It merely leaves these individuals
subject to the normal, common law test for employment status.
-'section 3121(d)(3)(A) classifies certain driver-distributors as
employees for employment tax purposes. It was made applicable to
the unemployment tax in 1972. See IRC § 3306(i). It has no
application or effect on their classification for income tax
purposes.
-'in 1950, the combined FICA tax rate for employees was 4% while
the tax on self-employed individuals was 2.25%. The "combined"
FICA tax rate for employees is the sum of the equal taxes paid by
employers and employees on wages paid to the employee.
-'see Senate Report 1669, 81st Cong., 2d Sess. 144 (1950).
- Indeed, the legislative history of the statute is replete with
references to house-to-house sales.
1098
in connection with the performance of such services (other than
in facilities for transportation) .-
It is apparent that the world has changed dramatically
from the time the statute was enacted in 1950. Door-to-door
deliveries of bread, milk and cakes have long since gone the way
of the dinosaur.- Today, local bakeries have disappeared,
having been consolidated into regional and national concerns.
Bakery products are no longer sold door-to-door. Instead, these
products are often distributed by individuals owning their own
territories, who purchase their products directly from the
bakeries, and who distribute the products to commercial customers
(such as grocery stores and restaurants) for resale.
More important still is the change in the respective
tax rates for employees and self-employed individuals. As
previously discussed, the combined FICA tax rate for employees in
1950 was 4 percent while the tax rate on self-employed
individuals was 2.25 percent. In 1984, these tax rates were
equalized.- Today, both the self-employed tax rate and the
combined FICA tax rate stand at 15.3 percent. Therefore, the
primary reason for the enactment of the statutory employee rule
— the higher tax rate for employees and the higher benefits
derived from that higher tax rate — no longer exists. Section
3121(d) (3) (A) is an anachronism in today's world.
Why Is The statutory Emplovee Issue Important Today?
Some members of the Subcommittee may wonder why this
issue is so critical in 1993 when the statute has been in effect
since 1950. The answer is simple. For many years the bakery
industry considered section 3121(d)(3)(A) inapplicable to most
distributors. It was not until 1991, when the Internal Revenue
Service issued GCM 39853, that the industry's long-held view was
called into question.
As previously discussed, the statute provides an
exception where the individual has a "substantial investment in
facilities." Throughout the years, many bakery distributors have
purchased their territories from the bakeries or from the
previous owners of the territories. The distributor's ownership
of the territory has been consistently interpreted as a
substantial investment in facilities, thus exempting the
distributor from the statutory employee provision.—
This interpretation of the substantial facilities
exception was never, to anyone's knowledge, challenged by the
Internal Revenue Service on audit. Indeed, in 1985, the Internal
- The statute also provides an additional exception in cases
where the contract contemplates that substantially all of such
services shall be performed personally by such individual.
-Throughout the 1940s and 1950s, bakeries were essentially local
operations. Bread and layer cakes were baked daily and delivered
to the homes of customers. These products were typically sold by
individuals who used delivery vehicles to cover certain
neighborhoods or routes. The vehicles used may or may not have
been owned by the individuals. Similarly, meat and vegetable
products were sold off of vehicles making house-to-house
deliveries. Milk was also delivered house-to-house, although
dairy products were excepted from the final version of the bill
without explanation. Finally, laundry services were typically
provided on a house-to-house basis.
-'see Social Security Amendments of 1983, P.L. 98-21, section
123.
^It Should be noted that many distributors have substantial
investments in equipment in addition to their investment in their
territories.
1099
Revenue Service concluded in a technical advice memorandum that
investment ^n a territory constituted a substantial investment in
facilities.— It was not until that technical advice
memorandum was withdrawn in 1988 and the IRS, in 1991, released
General Counsel Memorandum 39853 that the issue became one of
concern to the bakery industry.
GCM 39853 takes the position that the term "facilities"
in section 3121(d)(3)(A) does not include distribution rights,
such as a territory. Ironically, the Internal Revenue Service
has never sought to enforce the position taken in the GCM by
means of an audit or through litigation. The GCM stands as the
sole pronouncement of the IRS position on this issue.
There is serious doubt that the GCM is correct. Its
reasoning is questionable, its logic weak and its timing (41
years after the statute was passed) is suspect.— It is the
undisputed opinion of tax advisors to the bakery industry that
the position taken in the GCM would not prevail in court if the
issue were litigated. Nevertheless, the uncertainty that the GCM
has created among members of the industry makes legislative
action to clarify the issue imperative.
Effect on the Bakery Industry
1. Technical Problems
Application of the statutory employee rules to bakery
distributors would create numerous technical difficulties.
First, the distributor would be required to compute his or her
income two different ways — once as an employee and once as a
self-employed individual — since certain expenses are deductible
for self-employed individuals but not for employees. The
absurdity of requiring two sets of books for the same person,
especially a small business person, is self-evident.
Second, if the bakery is required to treat the
distributor as an employee, what amount does the bakery report to
the distributor and to the IRS as wages paid? Bakeries sell
their products to distributors. The distributor then resells the
product to the market or other establishment. The distributors
income is the profit made from this resale. The bakery has no
information about the profit the distributor has made. If the
bakery were to report the price paid by the distributor for the
product, that would grossly overstate the amount of income
actually earned by the distributor. It would totally fail to
take into account the purchase cost of the products and any of
the distributor's expenses (such as fuel, marketing costs, wages
paid to the distributor's employees, etc.), as well as any
discounts or allowances given to the distributor's customers
directly by the distributor.
The distributor system, as it has evolved through the
years, bears no resemblance whatsoever to a wage-based
compensation system. The industry would be forced to completely
restructure itself in order to comply in any meaningful way with
the statutory employee rule. The costs of this restructuring
would be wholly disproportionate to the benefit (if any) derived.
Finally, classification of distributors as statutory
employees is particularly confusing in light of the fact that
'see TAM 8607001.
— For example, the GCM argues that distribution rights (such as a
delivery territory) are more akin to education, training and
experience because all are intangible. Unlike education,
training and experience, however, distribution rights are assets
that are readily transferable and that have a value in the market
place that is affected by the skill and industry of the
distributor.
1100
many distributors have their own employees and operate in
corporate form. In particular, distributors with large, heavily
populated or prosperous territories may have several employees of
their own.
Many questions arise as to how the employees of the
distributor are to be treated. A few of those questions include:
(1) Will they be considered employees of the distributor or the
bakery? (2) If the latter, how will that affect their treatment
by the bakery for income tax purposes. (3) Are these employees
of the distributor eligible for benefit plans maintained by the
bakery? (4) If they are not treated as employees of the bakery,
are their wages deductible for purposes of computing the FICA tax
on the distributor's income.
This last question points out the strange consequences
of applying the statutory employee rule to bakery distributors.
If the distributor is treated as an independent contractor, wages
paid to the distributor's employees are deductible in computing
the distributor's self -employment tax. However, these wages are
not be deductible by the distributor if he or she is treated as
an employee. The result is that the wages paid to the
distributor's employees is subject to double FICA tax: once by
the bakery and the distributor (because these wages are not
deductible in computing the distributor's wages) and once by the
distributor and his or her employee, without question, this is
the wrong outcome. Yet it would be required if the statutory
employee rule applies.
The result is even more egregious under the recently-
passed Omnibus Budget Reconciliation Act of 1993. Before passage
of the Act, there was a cap on the wages or self -employment
income subject to FICA or self-employment tax.— Section 13207
of the Act repealed the cap on amounts subject to the hospital
insurance portion of the employment tax (now equal to 2.9
percent) beginning in 1994. Thus, where the damage done by the
statutory employee rule was once mitigated by the wage cap, that
cap as now been removed, at least for purposes of the HI tax.
It is not difficult to see that application of the
statutory employee rule to bakery distributors creates bizarre
results. Without any policy rationale remaining to support its
existence, this potential for bizarre results is a compelling
reason to eliminate the rule.
2. Effect on Entrepreneurship
The eventual outcome of applying the statutory employee
rule to the bakery industry is likely to be a complete
restructuring of the industry. A part of that restructuring will
no doubt be a severe cutback on the use of independent bakery
distributors. Such a result would be truly unfortunate in view
of the benefits that the industry (both the bakeries and the
distributors themselves) has gained from their use.
Application of the statutory employee rule would deny
an entrepreneurial opportunity to those individuals desiring to
operate a wholesale distributorship business. Independent
wholesalers have significant opportunities to develop a
successful distributorship and earn profits substantially greater
than the salaries that would be paid to employees. In addition,
if the distributor owns his or her distribution rights, the
distributor has the opportunity to build the value of the
distributorship that he or she may eventually sell for a greater
profit. All these incentives are lost, however, if the
distributor cannot be an independent wholesaler.
Moreover, application of the statutory employee rule to
existing ownership arrangements would substantially undermine the
and 135,000 for the HI portion of the tax.
For 1993, the caps were 57,600 for the OASDI portion of the tax
1101
value of the distributorships already in place. The value of
these existing arrangements was premised on an assumption of
independent contractor status. Application of the statutory
employee rule would severely lower those values to the detriment
of the distributors owning distribution rights.
Conqjusion
It is understandable that Congress would seek to
prevent abuses in the employment tax system that can occur from
classification of an individual as an independent contractor
rather than an employee. However, the bakery distributor system
is not riddled with those abuses. Even if the system were,
however, application of the statutory employee rule is clearly
the wrong answer to the problem. Indeed, its application would
create far more problems than it would solve. For all the
reasons stated above, we urge the Subcommittee to endorse the
proposal of the Independent Bakers Association to repeal the rule
with respect to bakery distributors.
Thank you very much, Mr. Chairman.
1102
EXHIBIT 1
SEC. XXX. CLARIFICATION OF SELF-EMPLOYMENT STATUS OF CERTAIN
BAKERY DISTRIBUTORS.
(a) In General.— Subparagraph (A) of section 3121(d)(3)
(relating to the definition of employee for employment tax
purposes) is amended by stri)cing "bakery products,".
(b) Effective Date.— The amendment made by this section shall
take effect on the date of enactment of this Act.
1103
Chairman Rangel. Thank you.
Next is Fred Lazarus, the Association of Independent Colleges of
Art and Design.
STATEMENT OF FRED LAZARUS IV, VICE PRESIDENT, ASSO-
CIATION OF INDEPENDENT COLLEGES OF ART AND DESIGN
Mr. Lazarus. Mr. Chairman, members of the committee, thank
you for allowing me to testify today. I am here representing the As-
sociation of Independent Colleg:es of Art and Design. These 30 col-
leges are major sources of designers throughout this country and
employ thousands of designers and artists on their faculties. They
include institutions that range on the West Coast from the Arts
Center in Pasadena to Parsons School of Design and the School of
Visual Arts in New York City. All of these are leaders in their field
producing the leading industrial designers in the automobile indus-
try, fashion designers, and graphic designers. There are dozens of
these institutions throughout this country.
We are here today asking your committee to correct what we be-
lieve was an oversight of the 1986 Tax Reform Act. That bill under
section 170(e)(4) provided companies who contributed equipment to
colleges and universities a greater level of deductibility for gifts
made for the purposes of the physical and biological sciences. This
section encouraged many gifts, enhanced research at these colleges
and universities, and is helping this Nation enhance its competi-
tiveness through the work being done by these colleges and univer-
sities.
The section does not allow the same level of deductibility for con-
tributions of equipment used in the fields of design. It is particu-
larly discriminatory to colleges that do not have physical or biologi-
cal sciences. Colleges such as ours, which do not nave these depart-
ments, are excluded firom these gifts and are not able to receive the
benefits that our colleagues in other colleges and universities have.
However, the contribution that these colleges are making to the
fields of design and to the competitiveness of this country are more
substantial than all these other institutions. The financial impact
of this modification in the bill would be negligible, and the impact
would be very significant. It would enhance research and develop-
ment in the field of design, and we hope we would have your sup-
port for this change in section 170(e)(4) of the bill. Thank you very
much.
Chairman Rangel. Thank you.
[The prepared statement follows:!
1104
TESTIMONY FOR THE MODIFICATION OF THE
INTERNAL REVENOE CODE OP 1986
September 8, 1993
Submitted by Fred Lazarus, President, Maryland Institute,
College of Art, on behalf of the Association of Independent
Colleges of Art and Design
Mr. Chairman and Members of the Committee. Thank you for
inviting the Association of Independent Colleges of Art and Design
to testify before you today.
The Association of Independent Colleges of Art and Design is
an organization representing virtually every art and design college
in the country. These colleges employ thousands of artists and
designers and include among their alumni the finest artists and
designers in this country.
We come before you to request your help in correcting an
oversight in the 1986 Internal Revenue Code which we believe, if
changed, will help enhance the competitiveness of American
industry.
The 1986 Internal Revenue Code, under Section 170(e)(4),
provides for a greater level of deductibility for contributions of
scientific property used in research activities by educational
institutions. However, for the gift to qualify, the property
donated must be scientific equipment used for research or
experimentation or for research training in the physical or
biological sciences.
This provision in the tax code has resulted in millions of
dollars worth of critical equipment being donated to colleges and
universities which offer degrees in the physical or biological
sciences and do research in these fields. The rationale for this
tax provision has been that this research has a direct impact on
the United State's economic competitiveness. The Ways and Means
Committee Report stated, as part of its rationale, that studies
indicate that in equipment-intensive research areas, such as
physics, chemistry, and electrical engineering, the continuing
growth of university expenditures has not kept pace with the rising
costs of scientific instrumentation. The budget impact of this
change was estimated to be $5 million.
The same rationale that caused the Congress to recognize the
importance of providing a greater level of deductibility for
contributions of equipment for the biological and physical sciences
can and should be applied to design and design theory. America's
competitiveness not only depends upon scientific research but also
on the quality of design of our products. The design process 15 to
20 years ago required a minimum of equipment. Today, that has
changed. Design today has become an equipment-intensive area of
research and study.
The design colleges and university design departments are the
country's major source of talent and know-how in the automotive
and product design fields, and fashion and in film. However, there
is a growing list of other product areas that draw upon the design
work of these colleges and universities. These fields include:
computer graphics; computer animation; image processing; scientific
and aga^^al visualization; object, product, process simulation and
dimensional modeling; image modification and storage; interactive
digital television; typography and letter design and image and
photo screening.
1105
Most of these applications are parts of the film, print and
graphics, and electronic imagery industries. These are huge
industries where our competitiveness is being threatened. However,
even more important to our economy is the impact these industries
and processes have on other product areas and manufacturing.
colleges and universities, particularly the specialized
colleges of art and design yhich produce most of our leading
designers, do not have the resources to provide their faculty and
students with the equipment that is now available. Much of the
research that is needed to determine how to use and apply this
equipment to the needs of the design fields is not being developed
because of the lack of monetary resources in the colleges and
universities.
The current language In the tax code precludes equipment
manufacturers from contributing equipment to colleges where the
intent of the donee is to use the equipment to advance design
theory or develop new concepts and uses of design. This impediment
has reduced the rate of progress in design research at the college
and university level and caused design training to lag behind.
This is a request made on behalf of the members of the
Association of Independent Colleges of Art and Design to modify the
current IRS code to include Design and Design Theory within the
definition of allowable research, experimentation, and research
training in Section 170(e)(4).
1106
Chairman Rangel. Mr. Rosenkranz, counsel, University of Flor-
ida Health Center.
STATEMENT OF STANLEY W. ROSENKRANZ, GENERAL COUN-
SEL, FLORroA CLINICAL PRACTICE ASSOCIATION, INC.; AND
SPECIAL COUNSEL, UNIVERSITY OF FLORIDA AGENCY, AND
UNIVERSITY OF SOUTH FLORIDA COLLEGE OF MEDICINE'S
FACULTY PRACTICE PLAN
Mr. Rosenkranz. Good morning, Mr. Chairman, and members of
the subcommittee. Our law firm is general counsel to the Florida
Clinical Practice Association, a section 501(c)(3) Florida not-for-
profit corporation, and special counsel both to the University of
South Florida College of Medicine practice plan and the University
of Florida agency funds.
The Florida Clinical Practice Association I will refer to as the
FCPA and the agency funds as the University Fund. I appear today
on behalf of our clients to support the enactment of a proposed
amendment to section 125(a) of Public Law 98-21, which I will
refer to as section 125.
While our firm does not represent the board of regents of the
State of Florida, I have been authorized to say the proposed
amendment has the full and enthusiastic support of the board's
chancellor. Section 3121(s) of the code speaks to FICA responsibil-
ity when two or more related corporations concurrently employ the
same individual. Section 125 under certain circumstances treats as
related corporations for purposes of section 3121(s) a State univer-
sity, which employs health professionals at a medical school, and
a faculty practice plan, which employs faculty members of such
medical school.
Section 125, however, requires employment by the practice plan.
To do so in Florida, which has broadly retained the doctrine of sov-
ereign immunity, would expose faculty members at the Health
Science Center and the respective practice plans to severe liabilitv
for medical malpractice claims. For multiple reasons, some of whicn
will be discussed later, including accommodating the instant situa-
tion, moneys are transferred to tne University Fund. From the Uni-
versity Fund from time to time, a check is drawn in part payment
of the compensation agreed to in the sole contract of employment.
As currently required by the Internal Revenue Service and cur-
rently the subject of controversy between the college and the Inter-
nal Revenue Service, the University Fund pays FICA as if it were
the sole employer. The result, a single contract of employment, two
checks in payment of the compensation required by the single con-
tract of employment, double employer share of FICA with no auto-
matic refund mechanism, double employee share of FICA with an
automatic refund provision, two form W-2s and two form 941s.
Our written statement cites both letter and published rulings in-
dicating that the existence of two taxpaying entities having two
taxpayer identification numbers and each filing separate W-9s and
Form 941s is not unknown to the Internal Revenue Service.
In short, the Internal Revenue Service is familiar with dual
payer situations such as that for which we contend. Moreover, in
the world of computers it should be a situation of no moment. The
proposed legislation will merely allow the intended result provided
1107
by section 125 a provision not practically available to the various
health professional colleges at the University of Florida Health
Science Center or the University of South Florida. The proposed
amendment postulates a position that is supported by an American
Association of Medical College letter that will be submitted for the
record.
It is also supported, Mr. Chairman, by a letter to you signed by
all members of the Florida Delegation, Democrat and Republican.
Based on our informal survey of other medical schools in this situa-
tion, it would appear that the revenue impact should be limited to
the employer's share of FICA that would otherwise be paid by the
agency funds at the University of Florida and the University of
South Florida. Thus, we estimate that the impact would not exceed
$3 million a year. These dollars would, of course, otherwise be
available to support academic and research activities and the provi-
sion of health care services to both categorically and medically indi-
gent patients.
The essence of the matter before this subcommittee is the pay-
ment of double FICA by respective agency accounts at the univer-
sities in Florida. The situation is caused by, one, the inability of
the agency funds to utilize section 125 because neither is a practice
plan and an employer and, two, the inability of our clients to con-
vince the Comptroller of the State of Florida, a constitutional offi-
cer of the State of Florida, to agree to effect payment of faculty
compensation in a manner that would obviate the need for legisla-
tion.
At a meeting with a member of the staff of the House Ways and
Means Committee's Subcommittee on Social Security, amplification
of this point was requested. As we attempted to prevent the double
FICA situation, an obvious solution suggested itself. In lieu of mul-
tiple payments due under a faculty member's single contract of em-
ployment, such payment would be effected solely through the Office
of Comptroller of the State of Florida.
In an attempt to effect such an arrangement, negotiations over
a protracted period of time were carried on with top officials of the
Comptroller's office. In addition to members of the staff of one of
the universities, as well as assorted legal counsel, the meetings
were attended by either the chancellor of the Florida system or one
of the vice chancellors. Three major concerns evolved.
One, when would the money become State funds if transferred to
the Comptroller and what would be the legal ramifications if the
funds were deemed to be State funds. The thought was that a
marked actuarial adjustment under the Florida retirement system
would be required. Having then just recently suffered the economic
consequences of such a readjustment, $6 to $7 million, the Univer-
sity of Florida College of Medicine was less than enthusiastic con-
cerning such a possibility.
The second problem was nonacademic intrusion into the aca-
demic decisionmaking process. This question is particularly perti-
nent in the State of Florida, a State where the university system
has been historically subject to the micromanagement proclivities
of both the legislative and executive branches of the State govern-
ment.
1108
At the University of Florida, practice plans contribute 52 percent
of the College of Medicine's budget, and at the University of South
Florida 55 percent of the College of Medicine's budget. Given such
facts, the chancellor, along with the academic leadership, felt it
most important to ensure academic control and oversight by man-
dating that these funds be retained in a university agency account,
thereby assuring continued university oversight.
The final problem was loss of flexibility in connection with fixing
the compensation of the clinical faculty. At a time when the health
care system is imdergoing tremendous change, particularly as re-
gards physician compensation, the prospect of such loss of flexibil-
ity was of grave concern. It was felt that the health care delivery
system environment mandated afforded each college of medicine
flexibility as to the compensation to be paid to members of the clin-
ical faculty staff", neither party being able to assuage the other's
concerns at the termination of the negotiations. The chancellor con-
cluded that it was not possible to fi'ame a solution that adequately
addressed the concerns of each of the involved parties.
Thank you, Mr. Chairman,
[The prepared statement follows:]
1109
WRITTEN STATSIENT OF STANLEY M. ROSENKRANZ OF
SHEAR, NEWMAN, HAHN ft ROSENKRANZ, P. A.,
GENERAL COUNSEL TO FLORIDA CLINICAL PRACTICE
ASSOCIATION, INC., A FLORIDA NOT FOR PROFIT
a}RPORATI(»« AND SPECIAL COUNSEL TO THE
UNIVERSITY OF FLORIDA AGENCY FUNDS AND THE
UNIVERSITY OF SOUTH FLORIDA COLLEGE OF
MEDICINE'S FACULTY PRACTICE PLAN SUBMITTED IN
SUPPORT OF A PROPOSED AMENDMENT TO SECTION
12S(a) OF P.L. 98-21 (THE "PROPOSED
LEGISLATION")
PRQPQgED LEGISLATIOr^
Section 3121 (s) of the Internal Revenue Code of 1986, as
amended (the "Code") speaks to "FICA responsibility" when two or
more related corporations concurrently employ the same individual
compensated through a common paymaster which is one of such
corporations. Section 125(a) of Public Law 98-21 (the "Special
Act"), under certain circumstances, treats as related
corporations for purposes of that Code section, a state
university which employs health professionals at a medical school
and a faculty practice plan which employs faculty members of such
medical school.
The Proposed Legislation would amend the Special Act as
follows :
"Sec. 125(a) of P.L. 98-21, TREATMENT OF CERTAIN
FACULTY PRACTICE PLANS OR UNIVERSITY ACCOUNTS.
"(a) General Rule — For purposes of subsection (s) of
Section 3121 of the Internal Revenue Code of 1954 (relating to
concurrent employment by 2 or more employers) —
"(1) the following entities shall be deemed to be
related corporations that concurrently employ the same
individual :
"(A) a State university which employs health
professionals as faculty members at a Health Science Center that
includes a College of Medicine, and one or more of the following:
a College of Dentistry, a College of Public Health, a College of
Nursing, a College of Veterinary Medicine, a College of Health
Related Professions, or a College of Pharmacy, and either
"(B) a faculty practice plan described in section
501 (c) (3) of such Code and exempt from tax under section 501(a)
of such Code --
"(i) which employs faculty members of such
medical school, and
"(ii) 30 percent or more of the employees of
which are concurrently employed by such medical school; or
"(C) an agency account of a State university
which is described in (a)(1)(A) of this section and from which
there is distributed to faculty members of any of the colleges
described in (a)(1)(A) of this section, payments forming a part
of the compensation the State, or such State university, as the
case may be, agreed to cause to be paid any such faculty member,
and
"(2) remuneration which is disbursed by either:
(A) such faculty practice plan to a health
professional employed by both of the respective entities referred
to in paragraph 1(A) and (B) of this section; or
1110
(B) such agency account to a faculty member of
any of the Colleges described in (a)(1)(A) of this section
shall be deemed to have been actually disbursed by the State, or
such State university, as the case may be, as a common paymaster
and not to have been actually disbursed by such faculty practice
plan or agency account, as the case may be.
"(b) Effective Date —"
The need for the Proposed Legislation emanates from the unique
manner in which compensation is paid certain members of the
respective faculties at the University of Florida (the
"University") Health Science Center in Gainesville, Florida and
at the University of South Florida in Teunpa, Florida ("USF").
Based on our informal survey of medical schools, it would
appear that the revenue impact of the Proposed Legislation would
be limited in scope. More particularly, the revenue impact
should be limited to the employer's share of FICA that would
otherwise be paid by the agency funds at the University of
Florida and the University of South Florida. Assuming (1) a
constant FICA tax rate and (ii) no dramatic increase in faculty
compensation, it is estimated the annual revenue impact would be
less than $3 million. These dollars would otherwise be available
to support (1) the respective medical colleges' academic and
research activities and (11) the delivery of health care services
to indigent and underfunded patients.
FACTUAL BACKGROUND
As an integral part of their respective University teaching
or research activities, or both, members of the respective
faculties of the University's College of Medicine, College of
Dentistry and College of Health Related Professions (singularly,
a "College" and collectively, the "Colleges") generate patient
fees (collectively, the "Fees"). The same would hold true for
faculty members of USF's College of Medicine.
Pursuant to rules of the Board of Regents of the State of
Florida (the "Board"), each such faculty member, as a condition
of employment by the respective colleges, agreed that all Fees
generated by his/her faculty activities will belong to and be
deposited into the practice plan created by his/her respective
College. There Is no employment relationship between any faculty
member and any practice plan.
The Florida Clinical Practice Association, Inc., a Florida
Not for Profit Corporation, which Is exempt under section
501(c)(3) of the Code (the "FCPA"), is the repository of all
patient fees generated by clinical activities of any member of
the faculty of the University's College of Medicine. From time
to time, subsequent to collection of the Fees by the FCPA or any
other practice plan, a substantial portion of such plan's monies
are deposited into an identifiable account within the University
of Florida agency funds (the "University Fund"). The latter,
Itself, is merely a statutorily authorized bank account outside
of the State Treasury. The FCPA also collects a portion of the
patient fees generated by the activities of faculty members of
the University's College of Health Related Professions, all of
which fees it deposits in the University Fund. The University's
College of Dentistry effects a direct collection of fees
generated by its faculty members. All of such fees are deposited
into the University Fund.
The monies in the respective practice plans are used to
support (1) the educational and research activities of the
1111
respective Colleges and (ii) the delivery of health care services
to indigent and to underfunded patients. Indeed, the FCPA, the
University's College of Medicine's practice plan, provides
approximately fifty-two percent of that College's entire budget.
Additionally, on a continuing basis, the assets of a
particular practice plan are the means by which a significant
capital project can be undertaken by the University. As an
example, the FCPA's gross revenues are the main source of
security for the bonds from the sale of which emanated the
capital to build and equip an academic research building at the
University's Health Science Center.
Each faculty member is employed by his/her respective
College pursuant to a single contract of employment. Pursuant to
pertinent rules of the Board, the compensation provided for in
such contract is approved annually by (i) the Dean of the
respective College, (ii) the University's Vice President for
Health Affairs, and (iii) the President of the University.
Pursuant to the single contract of employment, each faculty
member is compensated for services rendered in his/her role as a
teacher for both his/her teaching duties and for health care
services provided individuals concomitant to those teaching
responsibilities. For a substantial portion of the pertinent
faculty members, payment of total compensation is effected in the
form of two documents: a warrant from the State Treasury and a
check from the University Fund. The pertinent compensation
payments from the University Fund represent a procedure of
paying such faculty member's compensation with both State and
University Fund provided monies.
As noted, a faculty member is employed by the University
pursuant to a single contract of employment. For this reason,
the Special Act, which contemplates a duality of employers, is of
no benefit in this situation. Accordingly, by reason of such
compensation payments, the State and the University Fund, for its
respective component of such member's compensation, each issues a
Form W-2 to each faculty member whose total compensation is fixed
and paid as indicated in the first and last sentences of the
prior paragraph, respectively. The State and the University Fund
have separate federal taxpayer identification numbers. Utilizing
its own respective taxpayer identification number, the State and
the University Fund each also files a Form 941 .
The State, by reason of its "Section 218 Agreement", pays
employer FICA taxes and withholds employee FICA taxes on that
portion of the wages paid directly by the State to each affected
faculty member. In effecting compensation payments on behalf of
each of the Colleges, the University Fund, as required by the
Internal Revenue Service, also pays employer FICA taxes and
withholds employee FICA taxes as if it were an employer and as if
the State had not caused FICA payments to be made. (This
situation is presently the subject of a controversy between the
University Fund and the Internal Revenue Service.) Such is the
case despite the fact neither the State, the University, any of
the Colleges nor the University Fund deem the University Fund, a
mere bank account, a separate employer. Indeed, an appellate
court in Florida has held that such a fund is not an employer.
See. Bryant v. Duval County Hospital Authority, et al. 459 So. 2d
1154 (Fla. Dist. Ct. of App, 1984).
The essence of the matter before the House Ways and Means
Coimnittee's Subconunittee on Select Revenues is the payment of
"Double FICA" by respective agency accounts at the University of
Florida (Gainesville, Florida) and the University of South
Florida (Tampa, Florida). The situation is caused by the
inability (i) of the agency funds to utilize Section 125(a) of
Public Law 98-21 because neither is a practice plan and an
employer and (ii) of the Comptroller of the State of Florida (a
constitutional officer) to agree to effect payment of faculty
1112
compensation in a manner that would obviate the need for
legislation. At a meeting with a member of the staff of the
House Ways and Means Committee's Subcommittee on Social Security,
amplification of point (ii) was requested.
As the agency accounts, particularly the University of
Florida Agency Fund, attempted to prevent the "double FICA"
situation, an obvious solution presented itself. In lieu of
multiple sources effecting payment of the compensation due under
a faculty member's single contract of employment, such payment
would be effected solely through the Office of the Comptroller of
the State of Florida (the "Comptroller").
In an attempt to effect such an arrangement, negotiations
over a protracted period of time were carried on with top
officials of the Comptroller's Office. In addition to members of
the staff of one of the involved universities, as well as
assorted legal counsel, the meetings were attended by either the
Chancellor of Florida's State University System (the
"Chancellor") or one of the Vice Chancellors.
No mutually satisfactory agreement could be reached with the
Comptroller. Among the many concerns expressed and vigorously
discussed were the following:
1 . When, if at all, would the money transferred to the
Comptroller by the respective Agency Fund become "state
funds"? What legal ramifications would result?
If the funds were to be deemed "state funds", the
thought was that a marked actuarial adjustment
under the Florida Retirement System would be
required. Having just recently suffered the
economic consequences ($6 to $7 million) of such a
re-adjustment, the University of Florida College
of Medicine was less than enthusiastic concerning
such a possibility.
2. Non-academic intrusion into the academic decision
making process.
The question is particularly pertinent in the
State of Florida. Historically, the State's
university system has been subjected to the micro
management proclivities of both the legislative
and executive branches of State government. At
the University of Florida, faculty practice plan
funds represent approximately fifty-two percent
(52%) of its College of Medicine's budget, while
at the University of South Florida, fifty-five per
cent (55%) of its College of Medicine's budget.
Given such facts, the Chancellor, along with the
Academic leadership, felt it most important to
ensure academic control and oversight by mandating
funds be placed in an agency account, thereby, in
turn, assuring continued University oversight.
3. Loss of flexibility in connection with fixing the
compensation of clinical faculty. At a time when the
health care system is undergoing tremendous change,
particularly as regards physician compensation, the
prospect of such loss of flexibility was of grave
concern. The health care delivery system environment
mandated, it was felt, affording a College of Medicine
increased flexibility as to the compensation to be paid
to members of its clinical faculty staff. It was
thought that this important flexibility element would
be markedly compromised if funds were deposited with
the Comptroller.
1113
At the termination of these negotiations, the Chancellor
concluded that it was not possible to frame a solution that
adequately addressed the concerns of each of the involved
parties. Accordingly, it was impossible to arrange for
compensation to be paid from one source.
AUTHORITIES
In other situations, such duality of the source of
compensation has not prevented a result similar to the result
that the Proposed Legislation would provide. For example, the
Regulations promulgated under Section 218 of the Social Security
Act indicate that
"(W)here an individual in any calendar year performs
covered services as an employee of a State and as an
employee of one or more political subdivisions of the
State, or as an employee of more than one political
subdivision; and the State provides all the funds for
the payment of the amounts which are the equivalent to
the taxes imposed on the employer under FICA on the
individual's remuneration for services; and no
political subdivision reimburses the State for paying
those amounts; the State's agreement or modification of
an agreement may provide that the State's liability for
the contributions on that individual's remuneration
shall be computed as though the individual had
performed services for only one political subdivision.
The State may then total the individual's covered wages
from all these governmental employers and compute
contributions based on that total, subject to the wage
limitations in Section 404.1047." See Regulation
Section 404.1256.
The University Fund, of course, being a mere bank account, cannot
be considered a political subdivision for purposes of the
foregoing.
Acceptance of the dual source of funds concept is also
suggested by Code Section 31 21 (u) (2) (D) which specifically states
that all agencies and instrumentalities of a single state shall
be treated as a single employer. This language manifests
recognition that where an employee of a state performs services
for more than one agency or instrumentality of that state then
such service will be viewed as services for a single employer.
This section recognizes the singularity of the employment
relationship and limits the state's liability to a single wage
base for each of its employees for all agencies and
instrumentalities .
A similar view that dual sources of funds, by themselves,
should not prevent the existence of a single employer is also
suggested by the legislative intent indicated in the Senate Bill
Report for the Special Act. That law amended Code section
3121(b) and (s) to include a provision applicable when a state
university employs health care professionals at a medical school
and a tax-exempt faculty practice plan employs a significant
percentage of those same physicians. Given such a situation, the
Special Act mandates that the disbursements by the faculty
practice plan are to be deemed to be actually disbursed by the
university. Thus, the singularity of the employment relationship
is clearly recognized amd is deemed to require a single
calculation of the wage base. In short, the Special Act provides
that remuneration disbursed by the faculty practice plan to a
health professional employed both by the plan and the university,
will be deemed "to have been actually disbursed by such
university as a common paymaster and not to have been actually
disbursed by such faculty practice plan." Result: one FICA tax
payment, in a situation in which there is clearly two separate
1114
employers. This is to be distinguished from the University's
situation which involves one employer hiring each of its faculty
members pursuant to a single contract of employment and
compensating such faculty members from two sources.
That the existence of two paying entities could give rise to
a situation involving two taxpayer identification numbers should
be of no significance. A review of Private Letter Rulings makes
it at once apparent that such a situation is not unknown to the
Internal Revenue Service. Private Letter Ruling 66091 64800A (the
"Letter Ruling"), for instance, contemplated a situation
involving two separate corporations, A and B, each having its
own taxpayer (employer) identification number, which operated
under a joint contract. Under the contract, all employees
performed duties for both corporations. Only Corporation A,
however, filed employment tax returns.
Addressing the question as to which corporation had the
responsibility for filing such returns, the IRS determined that
the two entities were truly distinct employers and therefore,
each should file Forms 941 and 940. However, for those years
which corporation B, had failed to collect, report and pay FICA
employee tax, it was relieved of doing so, since corporation A
had already reported and paid the requisite amounts. In order to
satisfy the IRS, corporation B simply attached a supporting
statement to its employment tax returns, setting forth the entire
factual situation, that is, that FICA taxes had previously been
paid by corporation A.
Rev. Rul. 57-22, 1957-1 C.B. 569 (the "Revenue Ruling") also
suggests Internal Revenue Service familiarity with dual payor
situations. Factually, the Revenue Ruling was concerned with a
cooperative agreement between a federal agency and a state for
the investigation of the water resources of the state.
Under the terms of the agreement, each party paid a certain
amount of the expenses of the project. The agreement also
provided that tne field and office work pertaining to the
investigation was to be under the direction of the federal
agency. The state, however, agreed to carry the individuals on
its payroll and to make payment to them for their services.
The individuals involved in the project, worked for, took
orders from and were under the control and direction of the
federal agency. The state payroll claim, however, was made up by
the federal agency and approved by an officer of the state.
Moreover, the state did not select, or have any voice in the
selection of, the individuals performing the services. For FICA
purposes, the Revenue Ruling held that, based upon the applicable
common law rules for determining an employer-employee
relationship, the individuals were employees of the federal
agency.
SUMMARY:
As a result of effecting their respective contractually
obligated teaching or research activities concomitant with
patient care activities, or both, members of the respective
faculties of the Colleges generate Fees. The Fees belong to and
are deposited into the practice plan created by a particular
faculty member's respective College. From time to time, a
particular practice plan pays a substantial portion of the Fees
to the University Fund, a statutorily authorized bank account
outside of the State Treasury.
For services rendered in his/her role as a teacher and in
the health care services provided as incident to those teaching
responsibilities, each faculty member is compensated pursuant to
a single contract of employment. Generally, payment of such
1115
compensation is effected in the form of two documents: a warrant
from the State Treasury and a check from the University Fund.
An obvious solution to the "double FICA" situation -- i.e.,
all payments to be effected solely through the Comptroller -- was
not available, because no mutual satisfactory agreement could be
reached with the Comptroller. His office's concerns revolved
around questions such as (i) when, if at all, would the money
transferred to the Comptroller by each of the agency funds,
become "state funds" and (ii) what would be the legal
ramifications of such monies becoming state funds, such as
requiring unacceptable levels of actuarial adjustments in Florida
State Retirement System contributions. For their part, the
respective agency funds were concerned about ( i ) non-academic
intrusion into the academic decision making process and (ii) loss
of flexibility in connection with fixing faculty compensation.
The State and the University Fund each possesses a taxpayer
identification nximber. Each withholds the maximum FICA on the
compensation paid by it; albeit, neither deems the University
Fund either an employer for purposes of FICA or an entity
required to withhold and pay over FICA taxes. Rather, given the
existence of separate taxpayer identification numbers, the dual
paying over and withholding was utilized solely to insure the
Treasury Department that each faculty member's total compensation
had been properly recognized for FICA purposes.
The Employment Tax Regulations list a number of factors to
be looked to in determining whether an "employer-employee"
relationship exists. Treas. Regs. §31 .3401 (c)-1 (b) . None are
present in the instant situation. Manifestly, there is but one
employer -- the State of Florida.
The concept of multiple sources of payment and one employer
is not unique. See Regulation Section 404.1256, Code section
3121 (u) (2) (D), Senate Bill Report for Section 125(a) of Public
Law 98-21, April 20, 1983, PLR 6609164800A, and Rev. Rul. 57-22,
1957-1 C.B. 569. There being one employer, the University Fund
should be exempted from FICA responsibility to the extent the
State has carried out such responsibility.
1116
Chairman Rangel. Mr. Rosenkranz, wliere is the negotiation
now? Are you still working this out with IRS?
Mr. Rosenkranz. We have a claim for refund at the IRS. It is
being considered by the IRS at the agent level.
Chairman Rangel. Are you still talking with them or is the opin-
ion just pending?
Mr. Rosenkranz. My 30 years of practice tell me the opinion is
just pending. We can't break — frankly, Mr. Chairman, I can't break
through the agent and get to the district counsel's office to speak
lawyer-to-lawyer, and so I have every reason to believe that what
we are going to get is a denial of a claim for refund and we will
have to follow the judicial path.
Chairman Rangel. Congressman Ben Cardin, a hard-working
member of this committee, wanted badly to be here to introduce
Mr. Wright, as well as Mr. Lazarus, and he asked me through staff
to extend his deepest apologies, as well as indicating that he will
be leaving some questions for Mr. Wright for a response in the
record.
Now, as I understand it, Mr. Holmes, you are looking for an ex-
emption based on the status of your organization that would relieve
you of paying taxes for the employees?
Mr. Holmes. We represent 3,000 evangelical Christian schools.
There are approximately 10,000 private religious schools in Amer-
ica and about 20 percent of them, Jewish, Catholic, and Protestant
are not exempt from Federal unemployment tax. Eighty percent of
the schools that are members of our association are owned by a
church or they are affiliated with a church.
Chairman Rangel. I understood that in your testimony. Natu-
rally, you know, we try to protect employees in case of job losses
and unemployment, and what you are saying is that some entities
don't have to provide that protection, and you would like that same
type of exemption from taking care of the employees in case of job
loss?
Mr. Holmes. Well, I am aware of religious schools, church
schools that choose to cooperate and be part of mandator — they
are — if you are in a church situation. It is not mandatory, but you
may participate. If you are an independent board, then it is manda-
tory. We would like to give the schools the option to choose which
way they elect to do, just as church schools do.
In other words, they would not have to participate should they
not want to or they could if they chose to.
Chairman Rangel. I assume that you are hired to make certain
it is not mandatory and that the employee, you know, would not
be receiving unemployment benefits. I mean, you don't have any-
thing to say about the merits of participating? I know no one likes
anything to be done mandatorily, but since it is such a spiritual
and religious institution, you know, taking care of employees that
are out of work
Mr. Holmes. We have asked our schools to very carefully look to
ways that they can provide for the needs of their teachers and
staff, and each one of them does it a different way, but we
have
Chairman Rangel. What ways do you do that? What are those
ways that you take care of your employees?
1117
Mr. Holmes. We do not control what the schools choose to do,
but we have encouraged them to provide benefits. As a matter of
fact, we do annual surveys of what benefits are provided to encour-
age them to have more benefits, including retirement and ways of
providing for the needs for their family.
Chairman Rangel. But you don't know of any method that
they — they haven't told you how they would like to do that,
though?
Mr. Holmes. Well, having served as a superintendent of schools
in California, where there was a situation of having attached to
FUTA health care benefits in case a person was hurt off the job,
we provided that through a private agency.
Chairman Rangel. Why do you think the religious institutions
are exempt from mandatory coverage?
Mr. Holmes. Congress chose to exempt churches and church-af-
filiated entities from this law, and we feel that
Chairman Rangel. Why?
Mr. Holmes. Because they are a religious institution and this is
a form of taxation.
Chairman Rangel. It is a form of protecting the employees, isn't
it? I don't see any more reason why there should be any exemp-
tions, personally, and so if you protect the employees iust because
your boss is spiritual, that doesn't mean that the employee should
not be protected, in my opinion. In any event, there is no moral
basis for it. You just believe that in a sense similar type institu-
tions get the exemption from mandatory coverage for employees,
that just because your structure is different and you also are spir-
itually motivated to take care of the helpless, that you, too, should
not have to do it mandatorily, but from the deep spirit in which
you feel when you want to do it. OK
Mr. Holmes. Yes, sir.
Chairman Rangel. Mr. Wright, you, I gather, as relates to de-
preciation and the alternative minimum tax, believe that you are
better off under the new law, but not — the past legislation, but it
is not as liberal as you would like to see it.
Mr. Wright. The new law deals with basically simplification is-
sues, which are very significant and very useful, but it does not ad-
dress the issues concerning what we think was an incorrect change
included in the 1986 law concerning the lengthening of the depre-
ciation period for automobiles and light trucks. Based upon the
1991 Treasury Department study mandated by Congress, the de-
preciation period for automobiles and light trucks is much longer
than it should be.
Chairman Rangel. The bakers' problem is one of the distributors
being considered as employees?
Mr. Fanelll Mr. Chairman, if I may take that question, the
bakers in the baking industry and the distributors in the baking
industry are not looking for classification as independent contrac-
tors. We have no reason to claim special treatment in that area,
and we think whether or not these individuals are independent
contractors or employees should be judged by the same 20-step test
that the IRS and the courts have imposed on everybody in the in-
dustrv.
77-130 0 -94 -4
1118
The problem here is a statute adopted in 1950 which said essen-
tially that even if you were an independent businessman for pur-
poses of FICA tax, you would be treated as a statutory employee
under certain limited circumstances. At the time that law was
passed, the difference between FICA and SECA rates was signifi-
cant. The intent of Congress to make sure that bakery drivers had
the benefit of the higher FICA contribution rate and therefore
higher benefit payment at their retirement was primarily the moti-
vation for the statute. That is no longer the case. The rates are
substantially identical for both FICA and SECA, so there is no
positive benefit to this statute anymore, and it significantly threat-
ens the ability of the industry to establish independent contractor
relationships, which have worked very effectively and efficiently in
this industry, to create the kind of success stories that Mr. Cox re-
lated to the committee this morning.
Chairman Rangel. Is there any controversy as relates to the
unions involved in the relief that you are seeking?
Mr. Fanelli. I am not aware of any, Mr. Chairman. The indus-
try has functioned substantially identically to the way it functions
today since 1950, and this issue becomes important todav only be-
cause the IRS has recently changed its interpretation of the statute
and taken the position that the money that these people invest in
purchasing these distributorships, which can be very substantial
amounts of money, does not constitute an investment in facilities
under the statute.
Early in the 1950s they took the position that it did constitute
an investment, and they continued to take that position on an un-
broken basis for 40 years, and it is only in the last 2 years that
they have reversed themselves on that.
Chairman Rangel. Mr. Lazarus, did you include in your testi-
mony what benefits institutions such as yours intend to receive
from charitable donations if the legislation is changed?
Mr. Lazarus. The major benefit would be primarily electronic,
computer-related equipment that could be used by faculties of our
institutions in developing research on the applications of design.
This is now not being supported through contributions of equip-
ment because of the way the Teix Code is written.
Chairman Rangel. And what type of art and design would that
be?
Mr. Lazarus. It is related primarily to the design field, and those
would include all applied design from industrial design, automotive
design, fashion design, textile design to the graphic arts, and pack-
aging design as well.
Chairman Rangel. Is there a group of educators in this field
that support this? This is not just your institute.
Mr. Lazarus. No, I am here representing the Association of Inde-
pendent Colleges of Art, which includes all of the independent col-
leges. Most of the comprehensive universities in this country have
been able to receive this equipment because they offer degrees in
the biological and physical sciences. Because we are independent
colleges, we are excluded from those gifts because we don't have
those degree programs.
Chairman Rangel. But the independent colleges, they are formal
associations?
1119
Mr. Lazarus. Yes.
Chairman Rangel. Mr. Hancock.
Mr. Hancock. Thank you, Mr. Chairman.
Mr. Wright.
Mr. Wright. Yes, sir.
Mr. Hancock. OK I have two or three questions that I would
like to ask you. I think what we are talking about is decreasing the
length of time required for depreciation of leased vehicles, primary
vehicles. What do you estimate the life to be for a vehicle used in
business? What would be the proper number?
Mr. Wright. In our fleet, which I think is representative of the
industry and business-use fleets generally, it is between 27 and 29
months. You need to keep in mind that vehicles in that category
are generally averaging in excess of 2,000 miles per month, so that
level of use is a major factor of the length of the vehicle's term.
Mr. Hancock. The lease cars that they are using now on the
daily rentals, the companies don't keep them in service for any-
thing close to that length of time?
Mr. Wright. No, sir.
Mr. Hancock. If, in fact, we did reduce the time for depreciation,
do you have an estimate of how this could affect the economy?
Mr. Wright. Well, I think it is important to recognize, as I said
in my testimony, that well over 95 percent of our industry is buy-
ing vehicles manufactured by domestic manufacturers. In PHH's
case the average is about 97 percent. The ripple effect of the auto-
mobile industry in glass and steel and plastic and the rubber in-
dustry would have a dramatic stimulus, I believe, to the economy,
particularly at this point in time when the automotive industry
seems to be coming out of the doldrums. It is not the time to be
sending a message on reducing tax benefits on these business-use
assets.
Mr. Hancock. Well, if we were going to make the depreciation
deductions equal the loss of the value of the car, what would the
tax law have to say? Would it be straight line depreciation? I think
we are using straight line depreciation in my company.
Mr. Wright. Obviously, you can come up with numbers using a
combination of changing both the depreciation period as well as the
methodology of declining balance. The Treasury, when they devel-
oped their study which concluded that 2.8 years was the correct
number for business fleet vehicles, that was based upon a straight
line determination, but, again, that rate of depreciation — straight
line — and depreciable life of 2.8 years is only equal to economic de-
preciation without any incentive at all. We think that 4 years at
150 percent or 5 years at a 200 percent declining balance also
would reach economic depreciation. Again, these combinations of
rates and lines do not produce any tax incentive, as other assets
have, but would basically reach only economic depreciation.
Mr. Hancock. Well, isn't there a cap on vehicles now, the maxi-
mum amount that you can depreciate on a business car?
Mr. Wright. It is, for the so-called luxury cars, the types of vehi-
cles that we are talking about in the business fleets generally
range from $12,000 to $15,000 and are below that maximum cap.
Mr. Hancock. Thank you.
1120
Chairman Rangel. Mr. Cardin has arrived, but before I recog-
nize him, are there any other members who are seeking recogni-
tion?
Mr. Shaw.
Mr. Shaw. Thank you, Mr. Chairman. I will be very brief. I ap-
preciate being allowed to sit with this subcommittee of the commit-
tee that we all belong to, the Ways and Means Committee, and I
am here because of Mr. Rosenkranz' testimony and what he has
put forth for the University of Florida. I very much side with his
testimony as to what needs to be done. I think it is very clear here,
and, Mr. Chairman, I think you voiced a sensitivity to his testi-
mony. What they are seeking is more of a technical change or a
technical correction, I should say, rather than a substantive change
in the code.
When we get into a situation, as we are today, where we are try-
ing to bring the cost of health care down, admittedly, this is a very
small speck on the total question of health care. However, it is a
substantial amount of money to the State university system, which
I think should certainly be recouped by them. I would hope that
this would be put into law, if Mr. Rosenkranz is not successfiil with
bringing the Internal Revenue Service around without the neces-
sity of legislation. I think that this should certainly appear as a
substantive change to the law should the IRS not side with or not
fully understand the point that he is making.
It is clearly double-dipping. It is clearly taxpayers' money from
the residents of the State of Florida that is being double taxed on
the same employee, and I think that the merits are clearly on his
side and the side of the university system of the State of Florida.
I would just like to add my comments to the record in that regard.
Thank you, Mr. Chairman.
Chairman Rangel. Thank you, Mr. Shaw.
Mr. Kopetski passes, and the Chair recognizes the distinguished
Representative from Baltimore, Md.
Mr. Cardin. Thank you, Mr. Chairman. I want to thank you for
including on this panel two representatives from Maryland, Mr.
Wright, who is from PHH, who has done yeoman's service in our
community. I just really want to thank him for appearing here
today and welcome him to the Ways and Means Committee.
He brings an issue to our committee which I think is extremely
important, and that is to try to bring a little bit more economic re-
ality to the depreciation schedules used on leased vehicles. I hope
that we will be able to look into this matter and to try to adjust
the tax treatment to the realities of the real world as to the useful
life of the automobiles involved.
Also, I would like to welcome Fred Lazarus to the Ways and
Means Committee. Fred has brought to our attention a matter that
is extremely important to many of the private institutions. Fred
has done a great service to our community at the Maryland Insti-
tute College of Art, and it is a pleasure to have him here.
I would like to ask a question, if I might, to Mr. Lazarus as to
the Treasury's view on the legislation that is pending. Treasury
has basically indicated that they are not sure that this legislation
is needed, because private gifts to your types of institutions have
been keeping pace with need. I am wondering whether you could
1121
comment as to whether the private gifts have kept pace with the
needs of your colleges as the Treasury release would have this com-
mittee believe.
Mr. Lazarus. I can speak both personally and on behalf of oth-
ers. I have had corporations that are in the business of developing
equipment in the fields of design, particularly computer equipment,
that have indicated to me that they would not provide that equip-
ment to my institution because we do not qualify under this section
of the bill, and have proceeded to support university programs that
have biological and physical science programs with these gifts. So
there is no question that I and other institutions have been person-
ally experiencing the fact that we do not receive gifts that would
make a tremendous difference to us.
There is no question that some of the large universities have
been able to secure these gifts because thev do have the qualifica-
tions of providing degrees in the biological and physical sciences.
Mr. Cardin. So a company can make a gift to one college but not
to another because of the quirk in the current structure?
Mr. Lazarus. In your district, in the Baltimore area, an institu-
tion like the University of Maryland, Baltimore County can receive
a gift, and we cannot. That is correct.
Mr. Cardesi. I certainly want UMBC to receive a gift, but would
also like to see you qualified to receive a gift. Thank you, Mr.
Chairman.
Chairman Rangel. On behalf of the full committee, I thank this
panel for the changes in laws recommended. Staff may be getting
in touch with you if there are any other questions that members
have and they have not had a chance to ask. Thank you very much.
The next panel, representing the Screen Actors Guild, the Amer-
ican Federation of Television & Radio Artists, and the Actors' Eq-
uity Association, is a person well known in the arts from the city
of New York, Ron Silver. Also on this panel we have Mark J.
Weinstein, counsel from Squadron, EUenoff, Plesent, Sheinfeld and
Sorkin from New York.
We also will be listening to Lawrence O'Toole, president and
CEO of Braintree, Mass., representing the New England Education
Loan Marketing Corp. and the Education Finance Council. Rep-
resenting R.R. Donnelly & Sons Co. from Chicago, Frank Uvena,
senior vice president. Representing the American Financial Serv-
ices Association, Richard Romeo, chairman of the tax committee.
That concludes this panel.
Mr. Silver, it is good to see you once again. We all admire the
excellent performances that you give and those of us from New
York are proud to have you be included in our number. The com-
mittee is anxious to hear your thoughts on the tax provision as to
deductibility for unreimbursed business expenses.
STATEMENT OF RON SILVER, PRESmENT, ACTORS' EQUITY
ASSOCIATION; ALSO ON BEHALF OF SCREEN ACTORS GUILD,
AND AMERICAN FEDERATION OF TELEVISION & RADIO ART-
ISTS; ACCOMPANIED BY MARK J. WEINSTEIN, COUNSEL
Mr. Silver. Thank you very much, Mr. Chairman. Before I begin
I would like to introduce counsel here, Mark Weinstein.
1122
Mr. Weinstein. Good morning, Mr. Chairman, members of the
committee. Thank you for allowing me to speak today. I am Mark
Weinstein. I am a partner in Squadron, Ellenoff, Plesent, Sheinfeld
and Sorkin.
We are tax counsel to several performing artists unions, which
include the Screen Actors Guild, the American Federation of Tele-
vision & Radio Artists, Actors' Equity Association, and the Writers
Guild. As you know, seated to my left is Mr, Silver, a distinguished
performer who is currently the president of Actors' Equity Associa-
tion. Mr. Silver will speak on behalf of the performing artists
unions in support of a proposal to increase the adjusted gpross in-
come ceiling of section 62(a)(2) of the Internal Revenue Code from
$16,000 to $32,000.
We encourage Congress to further promote a policy of tax fair-
ness to the lesser known struggling actors, musicians, and writers.
These persons were the intended beneficiaries of legislation that
was enacted in 1986. In a nutshell, Mr. Chairman, the 1986 tax
provision, although enacted with good intention, simply does not
work. We are asking you to correct this result.
Mr. Silver.
Mr. Silver. Thank you. Mr. Chairman, my children went back
to school today. It was their first day in school. You are back at
work. I am going back to New York after this testimony. I wish us
all well this year.
On a personal note to you, sir, being a distinguished alumnus of
DeWitt Clinton High School, I will have you know that I went to
Stuyvesant High Soiool and for the last 46 years you have defeated
us in football. We have never been victorious over you, so I trust
that you will show us some kindness today in our presentation.
Chairman Rangel. You have always exceeded in the arts and
sciences, so I yield to you in that field.
Mr. Silver. Thank you, sir. I don't have to tell you, you know
it better than I do, that when legislation is enacted sometimes the
original legislative intent might not be effected and revisiting the
original legislation and amending it might be required to achieve
the bill's original intentions. Justice Scalia notwithstanding, I be-
lieve you still believe that.
I am not here on behalf of Steven Spielberg or Madonna, Arnold
Schwarzenegger, Sylvester Stallone, Jack Nicholson, et cetera.
Congress has already provided all the protection successful people
in mj^ business already need. They can form personal service cor-
porations and they can incorporate themselves and deduct all their
business expenses above the line.
I am here on behalf of the vast majority of the members of the
Actors' Equity Association, the Screen Actors Guild, and the Amer-
ican Federation of Television & Radio Artists, the vast majority
who are not able to deduct their legitimate business expenses. And
while we asked for this change in 1986, we are partially at fault
for not understanding some of the consequences, and it has had a
devastating impact, not only on the struggling actors and musi-
cians and performing artists, but on the mid-level professionals.
People outside of our business tend to see it as black and white.
There are young kids struggling to get into the business, and then
there are very successful people who work in movies and on stage
1123
and in TV. The reality of our business is that most people are mid-
level professionals that are eking out a living or earning a basic
subsistence, married and with children, and it is those people who
I am speaking on behalf
The current law, section 62(a)(2), which amended the code in
1986, was part of that Tax Reform Act. The reason for the change
then was to allow the lesser known struggling performers and mu-
sicians to deduct their job search and other business expenses such
as agent and other representational fees, which generally run 10
percent or more and costs for a video or audiotapes.
Now, the law actually stipulated that a qualified performing art-
ist was permitted to deduct their allowable section 162 expenses
above the line. To qualify for a QPA, a qualified performing artist,
you had to meet three criteria. You had to have more than one em-
ployer in the performing arts, you had to incur allowable section
162 expenses as an employee in connection with such services in
the performing arts at an amount exceeding 10 percent of gross in-
come from those services, and you did not have an adjusted gross
income as determined before deducting the expenses in excess of
$16,000.
Now, what was wrong with this was the law did not provide the
relief to the intended beneficiaries; that is, the lesser known strug-
gling artists and the mid-level professionals. The facts are these:
Based on 1992 earnings, less than 5 percent of performing artists
fell under the $16,000 adjusted gross ceiling.
Now, that sounds pretty good. That means 95 percent of them
earned more than that, so what am I here complaining about and
asking you here to do? Unfortunately about 92 percent of perform-
ing artists earn less than $15,000 from their craft. Now, in order
to earn a living wage, most of the people I know in this business
have to supplement their income by doing something else. They are
waiters, they are lawyers, they are carpenters, they are doing work
that will allow them to pursue their crafl while also enabling them
to earn a living wage to support themselves and their families.
Also in 1987 unemployment insurance became taxable, so if you
earned $15,000 and collected $2,000 UIB that would knock you out
of the box and put you over the limit as well. What I have here,
and I would like to submit for the record in addition to the written
record, are two tax forms. One is computed under the 1985 rules
and one is computed under the current rules, and if you assume
that the taxpayer is a performer working in a regional theater,
housing is usually provided for them, but other expenses, including
meals are paid out of the performer's take-home pay.
If the performer's weekly salary is $425, which is a minimum in
a regional theater, and she is employed for 40 weeks, she has
earned $17,000. If the performer spends $15 a day on food, which
is not terribly generous and all the other expenses for laundry,
whatever, total $50 — that is about a $4,250 deduction. If she has
received $2,000 in unemployment compensation, under the reform
act intended to benefit these people, the performer would have had
a Federal tax liabihty of $1,234. She was entitled to deduct all her
travel expenses, even though she didn't file a schedule A at that
point. She was also entitled to the standard deduction.
1124
Now, under the current postreform rules, the performer's tax li-
ability is $1,969, a difference of $735 or a percentage increase of
over 59 percent. This did not have the consequences that we antici-
pated. Now, why change the law to accomplish what was originally
intended? Performing artists as employees continue to incur costs
associated with employment that strongly resemble costs that are
incurred by independent contractors, not employees, and I can give
you a pretty good example of this from my own career and when
I started out.
If I earned $1,000, I had to pay $100, 10 percent commission, to
an agent. You have no choice. Every actor, every performer has an
agent in the business. They are essentially an employment agency.
Now, most employers pick up the employment agency fee. Actors
who are currently looking for work over and over and over again
consistently pay this employment fee of 10 percent. In order to con-
tinue working as an actor where I earned $1,000, I had to get pho-
tographs of myself, I had to get audiotapes, videotapes, I had to —
in addition to obvious expenses of keeping myself fit and this and
that, but that is really secondary. There were necessary expenses
that exceeded 30, 40 percent of my income.
Now, why we are asking for some correction of that 1986 bill is
that absent a change, the tax burden is not allocated equally to
persons of the same dollar gross income. If you are a ditchdigger
and you earn $16,000 and most of your expenses are paid by your
employer, you have an aftertax cash income of $14,481. Whereas
a performing artist earning that same $16,000 and incurring typi-
cal employee expenses of 20, 25 percent of earnings or $4,000 has
an aftertax income of $10,000.
In 1986 there was an interesting colloquy on the floor of the Sen-
ate when then Senator Wilson spoke very eloquently for the unique
situation of artists and why they should be treated perhaps spe-
cially in this area, and he stated, and I am not quoting him ver-
batim now, but I am paraphrasing him, that levying a tax on in-
come, not on gross receipts is a concept recognized in the tax treat-
ments of businesses, corporate or not, by allowing deductions for
ordinary and necessary expenses that help generate income.
If an employer covered such expenses, they would be deductible
to the employer for income tax purposes. The denial of deductions
for expenses that truly serve to generate income is not simply bad
tax policy, it is not fair: Deductions are not a loophole. Deductibil-
ity of legitimate employee expenses ensures that our Federal in-
come tax does not become a gross receipts tax. So respectfully, our
proposal would be that if you could see your way clear to increase
the earnings ceiling to $36,000, indexed for inflation, only income
earned from the performing artist craft be counted in the earning
ceiling and the earning ceiling should be tested individually for
married taxpayers. If two people are married and they are both ac-
tors or musicians or performing artists of any kind, we really need
an individually tested ceiling for both.
I would be happy to answer any questions. I don't want to take
more of the committee's time.
[The prepared statement and attachments follow:]
1125
MEMORANDUM
August 31, 1993
PROPOSAL ON BEHALF OF PERFORMING ARTISTS
FOR U.S. TAX LEGISLATION
Films, television and radio shows, theatrical performances, musical
concerts and videos are among the nation's most valuable trade assets. The
works created by United States filmmakers, performers, musicians and
technicians are dominant in virtually every market on every continent around the
world.
American films, shows and concerts are the best in the world because of
the expertise that resides in America. These fine artists are hardworking
persons who, unfortunately, currently bear a disproportionately greater tax
burden than workers in other crafts. Current United States tax policy
inappropriately penalizes the performing artist who, of necessity, must contend
with irregular employment patterns. The criteria of equity and fairness in the
implementation of a tax structure "demands that the income-tax burden should as
far as possible apply equally to persons of the same dollar income."'
Performing artists^ contribute to one of the nation's largest export
commodities - entertainment; an industry that returns to this country some $4
billion in surplus balance of trade. Most other industries do not yield such
favorable trade balances and do not contribute as much to the Gross Domestic
Product; yet employees in these industries do not suffer the tax burdens borne
by the performing artist under the Internal Revenue Code.
ACCORDINGLY. THE SCREEN ACTORS GUILD ("SAG"). THE AMERICAN FEDERATION OF
TELEVISION & RADIO ARTISTS ("AFTRA') AND ACTORS' EQUITY ASSOCIATION ("AEA"), FOR
THEMSELVES AND ON BEHALF OF OTHER UNIONS REPRESENTING PERFORMING ARTISTS.
RESPECTFULLY REQUEST THAT CONGRESS ENACT LEGISLATION TO EXPAND THE APPLICATION
OF INTERNAL REVENUE CODE SECTION 62(a)(2) TO MAINTAIN PARITY IN TAX TREATMENT
BETWEEN PERFORMING ARTISTS AND OTHER EMPLOYEES.
CURRENT LAW
The Tax Reform Act of 1986 (Public Law 99-514) amended the Internal
Revenue Code (the "Code") to provide an actor or other individual who performs
service in the performing arts (a "performing artist") an above-the-line
deduction for his or her employee business expenses (allowable under section 162
of the Code) during a year if the performing artist for that year (1) had more
than one employer (excluding any nominal employer) in the performing arts, (2)
incurred allowable Section 162 expenses as an employee in connection with such
services in the performing arts in an amount exceeding 10 percent of the
individual's gross income from such services, and (3) did not have adjusted
gross income, as determined before deducting such expenses, exceeding $16,000.
In the six plus years this amendment has been effective, the statute has
not, in practice, accomplished its objective of providing performing artists
parity of tax treatment with that accorded to other laborers.^
The $16,000 adjusted gross income ceiling of Section 62(b) has virtually
eliminated the intended tax benefit. Based on 1992 earnings and tax information
' Surrey, The Congress and the Tax Lobbyist - How Special Tax Provisions Get
Enacted, 70 Harv.L.Rev 1145 (1957).
^ This term includes both persons "in front of" and "behind" the camera.
^ See the colloquy among former Senator Wilson and Senators Packwood and
Bradley, attached hereto as Exhibit A, for a discussion of the reasons for the
amendment.
1126
for SAG, AFTRA and AEA members, less than 5% of performing artists fell under
the adjusted gross income ceiling. More than 95% of the performing artists had
adjusted gross incomes in excess of the $16,000 ceiling, yet their earnings from
the performing arts was far below the ceiling.* Thus, in order to earn a
living wage performing artists must supplement their performing arts income with
outside earnings. The $16,000 income ceiling penalizes the performing artist
whose earnings from all sources puts him or her above the ceiling. This is an
inappropriate result and demonstrates the need for an amendment to Section
62(a)(2).
BACKGROUND
The performing artist, while generally treated as an employee under the
income tax law, incurs costs associated with his or her employment that strongly
resemble costs typically incurred by an independent contractor. This situation
arises because of the inherently short-term nature of any particular employment
opportunity. While the average American worker will stay at one job for several
or more years, a performing artist's term of employment at any particular job
will rarely exceed a month or even a day. Due to the short-term nature of his
or her employment, the performing artist incurs job search expenses of a type,
frequency and amount that are not generally incurred by workers in other
industries. For example, an actor will incur expenses for travel to and from
various audition sites, resumes, video or audio tapes, photographic portfolios,
and gratuities to theater doormen.
Perhaps the most significant and unique costs incurred by a performing
artist are agent and other representational fees, which usually are 10% or more
of the artist's gross income. No other class of employee is burdened with such
a fee. In other industries the employer pays any employment agency fee and gets
the benefit of a tax deduction without limitation.
Additionally, performing artists incur other out-of-pocket expenses that
further reduce their true employment income. These include costs of
photographs, musical instruments, costumes, publicists and practice facilities,
as well as costs for maintaining physical condition and personal appearance.
It is the rare instance in other lines of employment that such expenses directly
effect a person's employment opportunities and success.
PROPOSAL
To fairly allocate the income tax burden to performing artists, we
respectfully request that Congress adopt the following proposal:
The language of Section 62(b)(1)(C) of the Code be amended to read in its
entirety as follows:
the adjusted gross income earned by such individual in
the performing arts for the taxable year (determined
without regard to subsection (a)(2)(B)) does not exceed
$36,000^ (increased by an amount equal to $36,000,
multiplied by the cost-of-living adjustment determined
under Section 1(f)(3) for the calendar year in which
the taxable year begins (but substituting "calendar
year 1992" for "calendar year 1989" in subparagraph (B)
thereof));"
Such amendment would properly reflect the intent of the 1986 changes by
establishing a clearer relationship between the earnings of a performing artist
in the performing arts and the tax burden that should be levied on such
earnings. A performing artist should not suffer a tax penalty because he or she
must supplement his or her income with income from odd jobs and unemployment
* This information was obtained from the 1992 federal income tax returns of
a representative sample of performing artists and from earnings reports
maintained by SAG, AFTRA and AEA. Attached hereto as Exhibits B through D are
charts which show an analysis of 1992 earnings by performing artists.
' This amounts represents the median earnings of families in the United
States for 1992 as provided by the Bureau of Labor Statistics.
1127
insurance benefits in order to support self and family. Earnings from outside
the performing arts bear no relationship to the performing artist's expenses
incurred in the performing arts. Such outside earnings should not restrict a
performing artist's ability to deduct allowable business expenses.
The proposed amendment establishes a ceiling amount which would provide
a living wage from the performing arts for the "lesser known, struggling actors
and musicians,"* which was the intention of the 1986 legislation. Such a
ceiling would not benefit any of the "better known" performing artists.
CONCLUSION
The proposal set forth herein should be adopted in order to provide equity
and fairness to performing artists who necessarily incur business expenses of
a type, frequency and amount not incurred by other employees. Otherwise the
performing artist will continue to bear a higher income tax burden on his or her
true economic income.
* 132 Cong. Rec. S 8132 (June 23, 1986). See Exhibit A for the complete
text of former Senator Wilson's statement.
1128
EXHIBIT A
132 Cong Rec 5 8132 Monday, June 23, 1986
The PRESIDING OFFICER. The pending business is the committee
substitute.
Mr. WILSON addressed the Chair.
The PRESIDING OFFICER. The Senator from California has the floor.
AMENDMENT NO. 2157
(Purpose: To allow for deduction of certain expenses related to an
individual's trade or business)
Mr. WILSON. Mr. President, as the votes on the Senate floor have made
clear, there is broad support for the tax reform bill as it was reported by the
Finance Committee. It is a bill that I enthusiastically support, and it is a
bill that I hope to see enacted -- enacted in a form very close to that of the
bill now before us.
But one issue I believe is dealt with better in the House bill is the
treatment of miscellaneous business expenses.
Mr. President, while there are many commendable reforms to be undertaken
as part of tax reform, we must remember that we are levying a tax on income, not
gross receipts.
This concept is well recognized by the tax treatment of businesses, be
they in corporate form or not, by allowing deductions for ordinary and necessary
expenses that help generate income. A broad array of deductions are allowed,
from advertising expenses, association dues, and costs of equipment to hand
tools and typewriter ribbons.
Yet, deductions for these same expenses would be denied by the Senate's
tax bill. No longer would carpenters be able to deduct the cost of tools or a
police officer deduct the cost of uniforms. Furthermore, if an individual loses
his or her job and incurs significant expenses to find a new ons, none of these
expenses would be deductible. I find this last change particularly objectionable
when considering all of the money we spend through direct Federal payment for
unemployment coverage or trade adjustment assistance in order to help the
unemployed.
It should also be noted that if an employer covered such expenses, they
would be deductible by the employer for income tax purposes -- and they would
not be imputed as income to the employees.
Mr. President, denial of deductions for expenses that truly serve to
generate income is not simply bad tax policy, it is not fair.
In this regard, I believe that the House took the proper route by allowing
for the continued deductibility of these employee expenses, while imposing a 1-
percent floor. The 1-percent floor is a reasonable threshold that allows us to
lower rates while imposing a relatively small burden on individual taxpayers.
Furthermore, it removes a significant auditing problem for minor expenses that
may be only tangentially related to the taxpayer's employment, thereby reducing
compliance costs. Unfortunately, the Senate bill, while also imposing a
1-percent floor, eliminates the deductibility of most types of employee
expenses. Mr. President, elimination of the employee expense deduction is not
supportable as a means of lowering tax rates, for the deduction is not a
loophole, nor is it an incentive that furthers some governmental policy that we
can no longer afford if we are to have lower tax rates. Rather, deductibility
of legitimate employee expenses ensures that our Federal income tax does not
become a gross receipts tax.
Mr. President, in order to show the impact that the Senate bill's
treatment of employee expenses would have, I want to highlight one type of
deduction that will no longer be allowed and its effect on one group of
employees performing artists.
The one aspect of the bill that I am referring to is the repeal of the
deduction for expenses incurred to search for new employment. This change will
1129
place an additional burden on someone looking to change jobs, and will be
particularly severe for anyone who is unemployed.
Within the group of unemployed, the change envisioned by the Senate tax
bill could have a devastating impact on people in the motion picture, music, and
television industries, as well as those who ply their trade on the stage or as
models, for by the very nature of their profession, their costs for finding new
employment recur over and over again in a continual fashion.
That is why I have prepared an amendment to the tax bill in order to
restore the deductibility of agency fees and related expenses that are incurred
for the purpose of finding new employment of limited duration.
Mr. President, what makes the impact disproportionately severe on actors,
producers, directors, musicians, and others in the entertainment industry is
that such individuals are constantly looking for new work, with the assistance
of agents and others, no matter how talented they may be. Employment is always
temporary, for regardless of how successful a movie or television show you
appear on, regardless of how good a musician you are, and regardless of how
successful a show you may be acting in, it is highly unusual that the length of
employment will extend as long as 1 year. Indeed, the employment more often that
not lasts only a few months, a few weeks, or even 1 day.
Now, the bill does not affect all similarly situated people in the same
fashion. It hurts only those in the entertainment industry who are at the bottom
of the ladder. Those at the top are unaffected by this one particular change.
The reason for the disparate treatment is that the big-name actors,
musicians, and others, have most often formed personal service corporations.
And, like other corporations, the cost of finding new business is an ordinary
and necessary business expense deductible by them. Or such people may perform
their work as independent contractors. And like other independent contractors,
the cost of acquiring new work is deductible to them as independent contractors.
The lesser known, struggling actors and musicians will, when they can
find work, be hired as employees -- and their agent and other representational
fees, which run 10 percent or more, will not be deductible. Also nondeductible
will be the costs of their resumes, which, because they often include video or
audio tapes as well as photographic portfolios, can cost hundreds of dollars.
Unfortunately, this group of lesser knowns constitute the vast majority
in the entertainment business. According to the New York Times, of the 50
percent of the members of Actors Equity that work during the year, half earn
less than $4,500. And at the Screen Actors Guild, 70 percent earn less than
$2,000 per year at their craft. At the American Federation of Television and
Radio Artists, the picture is somewhat brighter, but even there the median pay
is $11,000.
I do not know what the revenue impact would be of a remedial change to the
tax bill that would fix this problem. But I do know that leaving the bill in
its present state would unfairly penalize those struggling for success as
entertainers, for, by denying them deductions for legitimate job-search costs,
the kind that they continually must incur, it would make it even more difficult
for them to find employment.
I ask unanimous consent that a copy of this amendment No. 2157 be
printed in the Record.
There being no objection, the amendment was ordered to be printed
In the Record, as follows:
On page 1413 of the amendment, strike out line 24 and insert in lieu
thereof the following:
employer, and
"(4) Expenses for obtaining employment of limited duration. -- The
deductions allowed by part VI (sec. 161 and following) which consist of agency
fees and other related expenses directly related to the seeking of employment
of limited duration in the taxpayer's present trade or business, under
regulations to be prescribed by the Secretary."
1130
Mr. WILSON. Mr. President, I have a concern as I have stated and I
know that that concern is deeply shared by my colleague, the senior Senator from
New Jersey, and I would be pleased to inquire of him at this time his thoughts
on this issue.
Mr. BRADLEY. Mr. President, let me commend the distinguished Senator
from California for raising what I consider to be a short coming in the Finance
Committee bill. Existing law allows employees to deduct ordinary and necessary
expenses incurred in performing their jobs.
The Finance Committee bill, recognizing this provision has been
abused and has also imposed burdensome recordkeeping requirements, made some
changes I believe that went too far. I believe the bill went too far in making
draconian changes in this area.
I say to the distinguished Senator from California who I know is extremely
sensitive to the area that the amendment relates to, which is the performing
arts, that the issue is even broader than he has defined it. It is true that
performing artists will be particularly hard hit by disallowances of deductions
of employee business expenses but it is not just agency fees, and I think the
Senator's statement laid that out.
It is not just agency fees that we are talking about here but legitimate
out-of-pocket expenses for things like photographs, musical instruments,
costumes, publicists, and so on, that are legitimate expenses incurred in
producing income and therefore ought to be deducted.
I would say to the Senator that although performing artists are an
important example of this, a very important example of this, as he also
correctly pointed out, there are many other professions that would be affected
by a draconian provision in the final bill.
Take, for example, trades people like carpenters or bricklayers, or
whatever. They have to furnish their own tools and those should be deductible.
Expenses of those employees who have to buy their own uniforms in order to get
a job ought to be deductible. All these expenditures are legitimate business
costs. If they exceed 1 percent of the floor they should be deductible.
Let me say to the distinguished Senator from California that I share his
concern and I support what he is trying to do, and I hope that the conference
will restore the deduction for all employees.
Mr. WILSON. Mr. President, I thank the Senator from New Jersey for his
comment. I know that he has been very much concerned with the same problem, and
I know that it is his purpose to work for the elimination of this problem in a
way that is fair and equitable and that will allow those employees, who have the
myriad of expenses of the wide range that he has described and that I have
touched on in my own statement, to find some relief.
I wonder if I might inquire of the chairman of the Finance Committee, whom
I know has been eager to keep the bill in its present form and as free of
amendments as possible, whether or not his views are compatible with those
expressed by the Senator from New Jersey and the Senator from California. I know
that he, too, is aware of the problem.
Mr. PACKWOOD. I am. I talked to the Senator from New Jersey, and the
Senator from California was good enough to talk to me before he started his
comments tonight.
I am sympathetic to the problem. I think it is one that should be
addressed on a broader scale than one or two occupations or professions. That
is obviously an issue in conference that we will consider.
Mr. WILSON. I thank the distinguished chairman of the Finance Committee.
Mr. President, based on the colloquy that we have had, it is not my
purpose to pursue the amendment at this time. I am reassured by the expressions
here on the floor of a recognition that this problem Is one that needs to be
dealt with. I will look forward to the action of the conferees to bring equity
to it.
1131
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1134
Chairman Rangel. I know you have to leave and you will be ex-
cused. We will present whatever questions to you — first of all, you
know the committee and the Congress are very supportive of strug-
gling people. We know how difficult it is to break through. It is
equally as difficult for us to determine who is serious about being
in the business and who is serious about whatever they do.
We are going to have to work to attempt to fine tune this, and
if you don't have the answer today you can think about it, because
nobody in the business would want someone getting deductions
that they don't really deserve merely because they declare them-
selves as wanting to be considered a performer.
I can understand your audio tapes and your agent fees and
things like that. You weren't implying that meals should be de-
ducted in that, were you?
Mr. Silver. Yes. I was kind of explicit about it in my example.
Perhaps I shouldn't have been. But when you are on the road for
40 weeks, you often don't have facilities where you can cook for
yourself or do that. We have just got even the provision where
housing has been provided. Often not all your travel expenses to
get to the job, $15 a day.
Chairman Rangel. As long as you agree that this has to be
shown, that is in connection with working in the arts.
Mr. Silver. Absolutely. It should be connected to how much
money is actually spent.
Chairman Rangel. You see the problem that can be presented.
Mr. Weinstein. Yes. I have two comments to make, one with re-
spect to your concern about those who are not really in the busi-
ness. I believe the hobby loss rules currently in the Internal Reve-
nue Code take care of that problem.
Two, with respect to meals and travel, the provision would only
govern those expenses that are allowable deductions under section
162, meaning if the artist is away from home for less than a year
doing a road show and the expenses are otherwise allowable under
section 162, those would be within the coverage of this provision
currently and hopefully as extended.
Chairman Rangel. Besides the items already mentioned, what
other deductions do you think would be equitable in this area?
Mr. Silver. Any expenses incurred to allow them to generate in-
come, pursue their crafts and continually look for new work, be-
cause employment in my field is always temporary. When you fin-
ish a job, you don't know when the next job is coming, or if there
will be one. If somebody is earning $30,000 or $35,000 in their cho-
sen profession, something that they allegedly love to do, it is very
unlikely that they will be doing another job to generate more in-
come. If people are lucky enough to earn — $36,000 is the median
for a family of four — if they are lucky enough to earn that, very few
of them are pursuing other work to supplement their income unless
they want to live a certain way which we would not have it be al-
lowable. That is why we are asking for that figure at that point.
Chairman Rangel. Mr. Hancock.
Mr. Hancock. When you say "in the business," can that be meas-
ured fairly easily by the amount of income?
Mr. Weinstein. That is correct, sir.
1135
Mr. Hancock. If you are really in the business, you will have
some income from it. I don't understand what you mean by
Mr. Weinstein. The hobby loss rules deny deductions for ex-
penses incurred for someone who is not really in the business, but
instead is pursuing a hobby. If you are committed to being a per-
forming artist, there is always an opportunity of earning $1,000,
$10,000. Given the commitment of time and effort and expenses
that the performing artist incurs, that would be good evidence of
whether he or she is really in the business.
Mr. Hancock. Are you talking about being able to deduct ex-
penses beyond the amount of income from other sources? That is
what I don't understand. You can't deduct expenses from nothing,
can you?
Mr. Weinstein. If you are not subject to the hobby loss rule, that
means all expenses are allowable. If your expenses exceed income
and your total income threshold is under $16,000, under current
law you would get full benefit for the deductibility of your allow-
able expenses.
Mr. Hancock. Thank you.
Chairman Rangel. Do other members have questions? Mr.
Kopetski.
Mr. Kopetski. It is not clear if nonperforming art income is in-
cluded in that $16,000 ceiling or not.
Mr. Weinstein. The current law does not differentiate between
income from the performing arts and income from outside the per-
forming arts.
Mr. Kopetski. I assume that new performing artists are not tak-
ing advantage by either organizing as a corporation, a personal cor-
poration, because it is just not worth filing the papers and spend-
ing the money to become incorporated, is that the case?
Mr. Silver. I think most business managers would tell you that
that only pays to do at a certain income level. People earning so
few dollars, it probably doesn't pay for them to do that.
Mr. Kopetski. The Tax Code requires that they be employees
rather than declare themselves an independent contractor, Thev
would not meet the test of an independent contractor even thougn
they are working a day here, maybe a week there?
Mr. Silver. One of the mistakes we made is that when we said
"had more than one employer," we didn't take into account where
somebody works at a theater in Los Angeles or Chicago and are
employed for the season, and are lucky to be so employed, and they
work for 40 weeks, don't work the other 12 weeks, and they have
only had one employer. There were a couple of things that we were
remiss in not bringing to your attention in 1986.
Mr. Kopetski. The one employer would be stricken from the
code — ^you are going to keep the one employer exemption?
Mr. Silver. It is three-pronged. To qualify as a performing artist
you had to have more than one employer in the performing arts be-
cause we assume that is the nature of the business everybody does.
But we didn't take into account some people who are employed on
a long-term basis only having one employer.
Mr. Kopetski. Do you think we should address that by a 26-
weeks-of-the-year type? Is that something that is common, in other
words, in the theater?
1136
Mr. Silver. Yes. We have a lot of actors who are employed by
one theater for the season and don't find employment for the other
20 weeks they are not working.
Mr. KOPETSKI. Perhaps we should try to address that issue as
well, Mr. Chairman.
Oregon has a growing film industry, and also we have a lot of
writers living there because of our great quality of life there. I won-
der if that is iust my impression, or is it true that with airplanes
and faxes and modems today that people aren't necessarily living
just in New York or California and involved in the performing arts
industry, and that there may be different kinds of deductions today
if they are a screenwriter or playwrite, et cetera?
Mr. Silver. That is correct. Most of the people I know, if they
had the option, would probably live in Oregon.
Mr. KOPETSKI. New York is a nice place to visit.
Mr. Silver. I like it.
Mr. KOPETSKI. Thank you, Mr. Chairman.
Chairman Rangel. You are welcome to stay, but recognizing that
you have a pressing schedule in New York we thank you for your
testimony.
The committee is anxious to work with you to make certain that
where applicable as relates to aspiring artists that at the same
time we can distinguish between them and others that are just
doing it for a hobby. Thank you very much.
Mr. Silver. Thank you very much, Mr. Chairman.
Mr. Weinstein. Thank you very much.
Chairman Rangel. We will next hear from Lawrence CToole,
president and CEO, representing the New England Education Loan
Marketing Corp.
STATEMENT OF LAWRENCE W. OTOOLE, PRESIDENT AND
CHIEF EXECUTIVE OFFICER, NEW ENGLAND EDUCATION
LOAN MARKETING CORP., AND EDUCATION FINANCE
COUNCIL
Mr. O'Toole. Thank you for the opportunity to appear before you
today in support of H.R. 2603, the bill introduced by Congressman
Richard Neal, a member of your subcommittee, and Congressman
Joseph Moakley.
My name is Lawrence O'Toole and I am the president and chief
executive officer of Nellie Mae. I am before you on behalf of Nellie
Mae and on behalf of the Education Finance Council, which is a
trade association including 23 States and nonprofit secondary mar-
kets involved in the Federal student loan programs, thereby rep-
resenting virtually all of the nonprofit student loan providers and
all of the organizations that might be affected by this bill, if en-
acted.
As you know, the recently passed Budget Reconciliation Act in-
cluded the Student Loan Reform Act of 1993, which substantially
altered Federal policy in this area and the 28-year-old public-pri-
vate partnership that has provided student loan capital for genera-
tions of students.
Under this legislation, a new direct Federal loan program will be
phased in over the next 4 years, increasing to a level of 60 percent
of total national student loan volume in 1997-98. Conversely, the
1137
current Federal programs are expected to gradually reduce their
volume to 40 percent of new loan volume by that time. This grad-
ual and halfway solution represents a compromise between the
Clinton administration's desire to convert fully to a direct loan pro-
gram and those in Congress who were concerned that abandoning
the current system without first testing it presented too great a
risk to the delivery of funding for college students.
I am before you today to recommend your consideration and ap-
proval of Tax Code changes which we believe complement these
changes in Federal education policy, but which fall under the juris-
diction of the Ways and Means Committee rather than the Edu-
cation Committees. In many respects these complementary, hand-
in-glove changes mirror the policy actions taken by Congress in
1976 which substantially expanded the guaranteed student loan
program to provide access to student loans for all American stu-
dents and concurrently made Tax Code changes which authorized
the creation of scholarship funding corporations, organizations such
as our own.
As background, there are 21 scholarship funding corporations, as
defined in Tax Code section 150(d), across the country which pro-
vide secondary market support and services in the Federal student
loan programs. Nellie Mae is the largest of these and the fourth
largest student loan holder in the country. All other funding schol-
arship corporations rank among the 100 largest providers of stu-
dent loan capital in the Federal programs.
We have been and can continue to be effective stewards of Fed-
eral policy, providing innovation and superior administration of
these programs. Our local and regional focus and familiarity with
students, colleges and lending institutions in our areas contribute
to our strong performance. As an example, the Department of Edu-
cation recently released cohort default rates by a lender, and in
those statistics Nellie Mae's default rate was less than half of that
of the Student Loan Marketing Association, a Gk)vemment-spon-
sored enterprise.
Section 150(d) of the code defines scholarship funding corpora-
tions as private nonprofit corporations which are designated by
State or local governments and the activities of which are dedicated
exclusively to the Federal student loan programs. Since 1976 the
code has permitted these private nonprofit organizations to issue
tax-exempt debt to fulfill the education policy objectives of the Fed-
eral Government.
We believe that the Tax Code changes that we seek in section
2603 will again better permit our organizations to contribute to the
attainment of Federal policy obiectives by, one, allowing us to in-
crease the level of funding which we can efficiently and effectively
provide to students to make up for any reduction or withdrawal of
commercial lending institutions during this phase-down period;
two, by removing the restriction that our nonprofit activities be ex-
clusively related to the diminishing Federal loan programs, thus al-
lowing us to participate in activities permissible for section
501(c)(3) organizations generally; and three, in the longer term pro-
viding an effective transition for these organizations to the tax pay-
ing sector of our economy in order to preserve the experience and
expertise that has been developed over the past 17 years.
1138
We have been in close communication with the staff of the Joint
Committee on Taxation, the staff of the Treasury Department, and,
as a result, we believe that amendments to the original 2603 can
be developed to effectively meet the transition objectives of our or-
ganizations to satisfy the legitimate Federal tax policy questions
concerning nonprofit corporations and tax-exempt organizations
and can, over time, result in a conversion to the taxable sector
which will generate significant Federal tax revenues over a 5-year
period.
In brief, the amendments to 2603 would allow the transfer, at
fair market value, of a scholarship funding corporation's student
loan assets and of its outstanding debt, both taxable and tax-ex-
empt, to a successor taxable corporation.
Further, the scholarship funding corporation would be permitted
to invest any of its net assets into the equity stock of a successor
taxable corporation, but providing that equity interest was senior
and superior to any subsequent or additional equity interest, as is-
sued by the taxable corporation.
The amendments recognize the need for a transition provision in
this area providing a limited exception to the so-called "excess busi-
ness holding" ruling that is applied to tax-exempt private founda-
tions. This exception is limited in both time, 10 years, and scope
of business activity requiring that the successor corporation con-
tinue to engage to at least 50 percent of its business activities in
the Federal student loan programs.
While the amendments allow the transfer of outstanding tfix-ex-
empt debt to a taxable corporation, they do not create a new pri-
vate use as prohibited by the code. The use of tax-exempt debt to
support student loans has been part of the code since 1976. Simi-
larly, no changes to the statutory or regulatory treatment of the
tax-exempt bonds are proposed nor are there changes suggested
that would change the private activity bond caps by State. In this
area, consistent with the tradition of transition amendments, both
the tax-exempt corporation and the successor taxable corporation
would waive or forgo their ability to issue any tax-exempt debt in
the future. So we would be talking about just the currently out-
standing tax-exempt debt which would itself pay down over the
stated maturity of those debts.
In closing, I want to thank Mr. Neal and Mr. Moakley for their
sponsorship of 2603 and thank the subcommittee members and
staff for their interest. We believe that we have achieved that most
elusive of targets, a proposal endorsed by virtually the entire af-
fected population which helps to attain Federal education policy ob-
jectives and which contributes to Federal tsix revenues.
I would be pleased to answer any questions at the conclusion of
the panel.
Mr. KOPETSKI [presiding]. Thank you for your testimony.
[The prepared statement and attachment follow:]
1139
statement Of
LAWRENCE W. O'TOOLE
President and CEO
NEW ENGLAND EDUCATION LOAN MARKETING CORPORATION
On Behalf Of
NELLIE MAE
AND
THE EDUCATION FINANCE COUNCIL
Submitted} To
THE SUBCOMMITTEE ON SELECT REVENUE MEASURES
United States House of Representatives
September IS, 1993
I.
Introduction
My name is Lawrence W. O'Toole. I am President and Chief
Executive Officer of The New England Education Loan Marketing
Corporation, also known as "Nellie Mae". I appreciate this
opportunity to follow up my appearance before the Subcommittee on
Select Revenue Measures by submitting this statement on behalf of
Nellie Mae, and on behalf of the Education Finance Council, whose
membership contains sister organizations from across the
country.!'
We hope to serve as constructive participants in the
development of federal policy relating to student loan
programs. The contours of the federal policy in the student loan
area have changed over time to reflect the changing needs of our
nation's students. In this connection, we urge the Subcommittee
to support tax amendments that would permit scholarship funding
corporations to evolve, as the federal student loan programs
evolve, so that we can continue to accomplish our mission to
support these programs. The amendments contained in H.R. 2603,
introduced by Congressmen Neal and Moakley, represent a practical
and efficient means of assuring continued private sector support
for the programs without market dislocation. We hope the
Subcommittee will support an amendment of this type, as we do.
Scholarship funding corporations, which are described in
Internal Revenue Code section 150(d), are private, nonprofit
corporations which are devoted exclusively to providing capital
and services to support student loans made under the Federal
Family Education Loan Programs. We serve principally as
secondary markets for these loans. Altogether there are
approximately 21 nonprofit scholarship funding corporations
servicing this nation's students and their educational lenders.
We believe that passage of an amendment reflecting the
concept embodied in H.R. 2603 is vital to accomplishing our
mission of assuring that college students receive the financial
1/ Attached as an appendix hereto is a brief description of
the membership of the Education Finance Council.
1140
assistance they need. This financial assistance amounts to $15
billion in new student loans each year, which will be funded
through the current Federal Family Education Loan Programs and
through the recently enacted Federal Direct Loan Program.
II.
The Role of Secondary Markets for Student Loans
A. Secondary Markets within the Framework of the Privately
Funded Student Loan Programs.
Since the enactment of the Higher Education Act of 1965,
Congress has championed affordable financing for college
education. Until the enactment of the Omnibus Budget
Reconciliation Act of 1993, which provides for a graduated phase-
in of student loans funded by . the federal government, the
hallmark of our nation's higher education policy has been to
encourage private lenders to provide affordable student loans
under the federal guaranteed student loan programs. These
programs rely on the voluntary participation of private sector
organizations to provide capital to originate student loans, to
provide secondary markets offering liquidity to lenders and to
service these loans.
To further its policy of encouraging low-cost educational
financing. Congress has long permitted state and local
governments and organizations formed on their behalf to issue
tax-exempt bonds to raise capital to acquire or finance student
loan notes. However, because some states and local governments
were not permitted to form organizations that could issue tax-
exempt financing for student loans, under a special provision
enacted by Congress in 1976 private, nonprofit corporations
formed under state law and whose income is devoted to acquiring
student loans are permitted to issue tax-exempt bonds to finance
the purchase of those loans.
For this reason, it is fair to say that nonprofit
scholarship funding corporations are literally creatures of the
federal student loan programs and the tax code. In order for the
interest paid on outstanding tax-exempt bonds to remain exempt
from federal income tax, we are required to operate exclusively
for the purpose of acquiring student loan notes made under the
Higher Education Act of 1965. However, because of the many
statutory limitations and restrictions on the use of tax-exempt
financing, scholarship funding corporations often use both
taxable and tax-exempt sources of debt to finance the acquisition
of student loan portfolios. As nonprofit corporations, we are
prohibited from raising capital to support student loan programs
through the equity markets.
Nonprofit scholarship funding corporations serve an
important function in the student loan financing process, by
assuring a reliable source of replacement capital for originating
lenders. By providing liquidity to lenders, the lenders are able
to make more loans to student borrowers. The importance of our
role is recognized by Congress and the Department of Education,
which treat nonprofit scholarship funding corporations as
"eligible lenders" under the federal student loan programs.
But our efforts go far beyond merely acquiring and holding
student loans. Although our primary purpose has been to serve as
a secondary market for originating lenders, in fact we provide a
broad array of services to the federal student loan programs and
participants in those programs. These include originating
student loans themselves, consulting with and advising lenders
and loan guarantors regarding underwriting, servicing and default
controls, and assisting borrowers with repayment matters. We
also have devised sophisticated, financial systems which account
for and monitor outstanding loans. Our workforce is experienced,
well-trained and efficient.
1141
In sum, scholarship funding corporations have brought much
innovation and efficiency to the federal student loan programs.
This has reduced the burdens of students, lenders, guarantors and
the federal government, while facilitating the delivery of $15
billion in new loans to almost four million students annually.
Our local and regional activities often place us closest to the
student borrower and make us better able to secure repayment of
troubled loans, which reduces federal costs. As a consequence of
our local nature and our systems and procedures, we are able to
minimize the default rate on the student loans we hold.
The Student Loan Reform Act of 1993, adopted as part of the
recently enacted Omnibus Budget Reconciliation Act of 1993,
represents a substantial shift in federal policy and will,
beginning in as little as 10 months, create a new federal direct
student loan program to compete with the current federal student
loan programs.
Our foremost concern — and I am sure the concern of
Congress as well — is that all eligible students have access to
the loan capital which they need to complete their educations.
Our organizations have played and can continue to play
substantial roles in assuring that this goal is accomplished.
For reasons outlined below, there will continue to be a
great need for private capital during the four year phase-in
period of the direct loan program. The concepts of H.R. 2603
effectively will allow scholarship funding corporations to have
access to equity capital that can be leveraged for the benefit of
the student loan programs during this period. Just as important,
these concepts will provide scholarship funding corporations the
opportunity to remain "going concerns" having the flexibility to
preserve and best utilize our expertise and operational
capabilities to support the new federal policy and the
administration of the federal student loan programs after 1997.
B. Anticipated Consequences of Federal Student Loan Program
Changes .
Under the recently passed Budget Reconciliation Act, signed
into law by President Clinton on August 10, 1993, the federal
government will begin making direct student loans in the 1994-95
academic year. Direct loans will account for a maximum of 5
percent of loan volume in that year, increasing to maximums of 40
percent, 50 percent and 60 percent in the 1995-96, 1996-97 and
1997-98 academic years, respectively.-' The direct loan program
adopted by Congress will rely to a large extent on colleges,
universities and other institutions of higher education to
originate loans with students. In addition, however, the federal
government will contract with third parties for loan origination,
servicing and collection activities. Thus, under the direct loan
program, significant private sector participation will be
required to implement and administer the program. As noted
above, these functions are many of the same now successfully
performed by nonprofit scholarship funding corporations, and we
believe that students will benefit if the federal government has
a large pool of competitors for these service contracts.
With the introduction of the direct loan program and the
many financial cuts made in the current programs, it is expected
that a number of lending institutions will terminate their
participation in the federal programs." This will occur for
several reasons. First, with the advent of a direct loan
program, many lenders will decide to devo'te their resource to
2/ It is not clear at this juncture what changes to the mix of
privately and publicly funded student loans will occur
after academic year 1997-98.
1142
investments other than the guaranteed student loan programs. 1/
Lenders will find it difficult to justify increasing their
investment in a program that may be phased out and ultimately
eliminated. Moreover, the impetus for lenders to terminate
participation during the transition period will increase because
of the significant reduction in financial incentives for
participation, such as the required one-half percent origination
fee charged lenders and required default risk-sharing under the
new policy. Second, there will be increased concern among
lenders that state guaranty agencies will experience financial
difficulty because of the potential impact of reduced loan
volumes on the revenues and solvency levels of those guarantors
and due to their own risk-sharing. Third, capital markets may be
more reluctant to invest in the bonds and notes of nonprofit
scholarship funding corporations during the transition
period.l' As a consequence of these scenarios, one can expect
that the availability of private. sector capital could decline
significantly during the comparison period.
In summary, the phase-in of the direct loan program,
especially when coupled with reduced financial incentives for
private lenders and state guaranty agencies, virtually assures
that only focused, high volume lenders will remain to provide
private loans to students. The overall loss of private capital
to sustain student loans issued by the private sector during the
transition period will result in a substantial need for capital
from other sources, a need which can be met effectively by
scholarship funding corporations aided by the proposed
amendments.
C. Impediments Preventing Scholarship Funding Corporations
from Raising Needed Capital.
Many nonprofit scholarship funding corporations are ready
and willing to meet the additional private sector capital needs
during the transition phase. Unfortunately, however, we face
both legal and practical constraints affecting our ability to
raise additional capital to support the transition. From a legal
standpoint, as nonprofit organizations described in section
501(c)(3) of the Internal Revenue Code, we are unable to raise
equity capital from private investors. All of our equity capital
must be internally generated through retained earnings. Because
our earnings-generated equity capital builds slowly, it cannot
itself be expected to provide sufficient additional capital to
meet funding needs.
The prohibition against equity investment also serves to
limit the amount of debt financing which may be accomplished as a
result of the insistence of the financial markets on reasonable
debt-to-equity ratios. For example, Nellie Mae's own ratio of
debt-to-equity is approximately 20:1; thus, increasing debt
levels substantially to accommodate large new loan volumes may be
difficult.
Further, the default risk-sharing and reduction in loan
yield provisions of the Budget Reconciliation Act will make debt
financings more difficult without added cushions of equity
protection for bond and note holders.
3/ For example, already one of the nation's largest banks has
solicited proposals to sell its student loan portfolio
worth approximately $250 million.
4/ As a consequence, to the extent they do in fact invest,
investors likely will require higher interest rates to
account for this perceived greater risk.
1143
Lastly, potential investors will look to the single purpose
restriction of section 150(d) with concern and ask the question,
"How will the experience and expertise of these organizations be
utilized if up to 60 percent of the student loans made under
federal programs are converted to direct federal loans?". The
transition relief provided by H.R. 2603 effectively responds to
that question by providing long term opportunities to utilize
that expertise, while facilitating the delivery of needed private
capital during the transition period.
We believe our nation's students will continue to derive
substantial benefits by having regional organizations, such as
ourselves, compete with Sallie Mae for secondary market purchases
of loan portfolios and for services to be provided to the
Department of Education with respect to direct student loans. It
is virtually impossible to believe that the private sector
capital required during the transition phase could be raised by
start-up corporations nor used efficiently by such corporations
during the transition. The time frame is simply too short and
the investment in systems and personnel too great. The solution
to the anticipated capital vacuum must address the need to avoid
operational redundancies and to preserve operational
efficiencies. Nonprofit scholarship funding corporation stand
ready to assist in solving the dilemma caused by this anticipated
capital drain.
III.
The Efficient Transition Solution of H.R. 2603
The basic concept of H.R. 2603 offers a simple yet
efficient blueprint for strengthening the ability of the private
sector to provide capital during the transition phase and, at the
same time, contributing to an increase in federal tax revenues.
In brief, H.R. 2603 provides three substantive elements of
transition relief. The first is the deletion of the restriction
that the nonprofit organization electing the transition be
engaged exclusively in providing a secondary market for the
federal student loan programs. This amendment would allow the
nonprofit to engage in activities permitted Internal Revenue Code
section 501(c)(3) organizations generally. Although it would
retain an economic investment in a corporation taking over its
student loan secondary market role, the nonprofit must remain
devoted to charitable, educational or other exempt activities.-'
The second element would permit the transfer of the
scholarship funding corporation's assets, and the assumption of
its outstanding debt (both taxable and tax-exempt), by a
successor taxable corporation in exchange for an economic
investment in the successor. This element would permit the
scholarship funding corporation to make a transitional investment
of its net assets in the equity stock of the successor
5/ Nellie Mae, through its sister organization Nellie Mae,
Inc., itself a section 501(c)(3) organization, already
undertakes traditional charitable activities. It has
established the Nellie Mae Fund for Education which, over
the last three years, has provided more than $2 million in
funding for over 76 educational projects. These grants
have included projects designed to encourage at-risk
students to stay in school, establish goals, and build
aspirations that provide the impetus to pursue post-
secondary education. In addition, Nellie Mae, Inc. engages
in programs designed to expand access to higher education
financing for students and families no longer eligible for
federal programs or whose financial needs exceed the limits
of federal student aid.
1144
corporation. The successor would be able to increase its equity
capital by the issuance of further equity stock interests, as
necessary to provide acceptable ratios for further debt issuance
to meet student loan needs. This solution will solidify the
secondary market for student loan notes during the transition
period, provide additional capital for loan origination, and
preserve the student loan origination and servicing expertise
that will aid the federal student loan programs after the
transition is complete. Most significantly, these goals will be
accomplished as efficiently as possible, without the inevitably
wasted lag time or market dislocation that would occur if
scholarship funding corporations were forced to wind down.
Finally, the third element of relief is the ability to
structure the nonprofit's economic investment in the successor to
contain voting rights, without causing the immediate imposition
of the tax on the "excess business holdings" applicable to
certain nonprofits. This relief will afford the nonprofits the
ability to protect their investment.
Specifically, H.R. 2603 would amend section 150(d) of the
Internal Revenue Code to permit a nonprofit scholarship funding
corporation to elect to transfer all of its student loan notes to
a for-profit successor corporation, and for the successor
corporation to assume (or otherwise arrange to repay) the
outstanding tax-exempt debt of the nonprofit. Under the bill,
this transaction, in and of itself, would not adversely affect
the income tax exemption for interest paid with respect to the
tax-exempt debt. No new "private use" exemption for tax-exempt
bonds would be created by this transfer: the bonds still would be
devoted to the acquisition of student loan notes under federal
programs, which is the intent underlying Internal Revenue Code
section 150(d); moreover, the nonprofit sector would retain the
benefit of the value of the net assets transferred through its
economic interest in the successor corporation.
In essence, the bill would allow a scholarship funding
corporation to convert to a for-profit corporation and maintain
its operational efficiency by transferring all of its functions
as a "going concern." By allowing a full and complete "going
concern" transition, H.R. 2603 provides scholarship funding
corporations the ability to immediately seek additional capital
to support the direct loan phase-in period and to preserve their
capabilities as independent service contractors to the Department
of Education with respect to direct loans.-'
To meet the requirement of the election, the nonprofit must
remain an organization described in section 501(c)(3) of the
Internal Revenue Code after the transfer. Thus, the nonprofit
would not continue to be limited to investing only in student
loan notes issued under the Higher Education Act of 1965, but
would be able to undertake the broader activities of an
organization described in section 501(c)(3), such as charitable
or other educational activities. The economic return received by
the nonprofits from its investment in the successor would be a
primary funding source for the nonprofit's exempt activities.
We recognize that an important aspect of this proposal is
ensuring that the investment made by the nonprofits in the
successor corporation is protected, both from an economic and
6/ The concern has been raised that, after the transition, th
scholarship funding corporations may not remain as
participants in the federal student loan programs.
Although we believe this concern is unwarranted, we would
not object to reasonable statutory rules that require the
successor corporations to serve the federal student loan
programs; after all, this is our mission.
1145
corporate governance standpoint. We continue to discuss these
aspects with the staff of the Subcommittee, representatives of
the Treasury Department and the staff of the Joint Committee on
Taxation. We believe the outcome of these discussions will be an
appropriate resolution of these concerns that does not place
unnecessary burdens on the successor corporation's ability to
raise additional capital to support private financing of student
loans.!/
Solely as a result of the transfer of assets and
liabilities to the for-profit corporation in exchange for the
economic interest in that corporation, it is likely that the
nonprofit would become subject to one of the excise taxes imposed
on section 501(c)(3) organizations that are classified as private
foundations (i.e., those section 501(c)(3) organizations that do
not meet certain thresholds of financial support from the
public). Under section 4943 of. the Internal Revenue Code,
private foundations that have "excess business holdings" are
subject to an initial tax equal to 5 percent of the value of such
holdings and an extremely onerous additional tax if the situation
persists.
In view of the close relationship between the secondary
market activities of the successor corporation after the transfer
and the secondary market activities of the nonprofit scholarship
funding corporation prior to the transfer, H.R. 2603 provides
limited relief from the tax on excess business holdings
attributable to the nonprofit's investment in the successor
corporation. Under the bill, the excise tax under Code section
4943 for the "excess business holdings" of a private foundation
will not apply with respect to the nonprofit's stockholdings in
the successor corporation, but only so long as more than 50
percent of the gross income of the successor corporation is
derived from, or more than 50 percent of the value of the assets
of the successor corporation consists of, student loan notes.
This transition relief is narrowly crafted. It would apply
only when the successor corporation is primarily servicing the
same function after the transfer as the nonprofit served prior to
the transfer. Significantly, it avoids unwanted competition
between the nonprofit and the successor for equity investors in
the successor corporation's stock during the transition, which
would potentially drain capital from support of the federal
student loan programs. This is an important consideration.
This limited exception to the excess business holdings rule
of section 4943 is appropriate for two reasons. First, we
believe that, from a corporate governance standpoint, it is
necessary for a nonprofit which is making a substantial
investment in the successor to have a voice in the direction of
that corporation so it may protect its investment. Although the
nonprofit should not be involved in the everyday business
decisions of the successor, it should be able to express its
approval or disapproval of major corporate transactions or other
significant corporate matters commensurate with its interest in
the successor. Second, the exception is necessitated by a change
in federal policy as it affects an organization devoted to
serving the prior federal policy. In contrast with many other
statutory exceptions, this exception in fact would facilitate the
implementation of the new federal policy.
7/ For example, these objectives perhaps could be accomplished
by structuring the investment in the successor corporation
as the most senior equity interest in the successor
corporation, with features that would permit the investment
to participate in the appreciation in value of the
corporation yet protect the investment from downside
potential.
1146
Once a nonprofit scholarship funding corporation makes the
election, we believe that neither the nonprofit nor the successor
corporation should be allowed to issue additional tax-exempt
debt. The proceeds of tax-exempt debt outstanding on the date of
the transfer, in the hands of the successor corporation, will
continue to support the student loan programs until that debt is
retired. Moreover, any earnings benefit derived by the successor
corporation from the tax-exempt debt will be fully subject to
federal income tax.
IV.
Conclusion
We urge the Subcommittee to support the concept contained
in H.R. 2603. This proposal offers a cost-effective means of
bolstering the capital base of the, secondary student loan market
during the transition period and of assuring that the expertise
and workforce of the scholarship funding corporations are
maintained to provide services in furtherance of the federal
student loan programs. In short, the proposal would permit
scholarship funding corporations to evolve with the federal
student policy, serve the recognized needs for capital and
services provided by the private sector and, in this connection,
compete with Sallie Mae to the benefit of the federal government
and our nation's students.
The adoption of an amendment of this type will, we believe,
also have the effect of increasing federal tax revenues by
transferring this student loan activity from the tax-exempt to
the taxable sector. We look forward to working with the
Subcommittee to refine this proposal so that these goals can be
accomplished.
1147
The Edncation Finance Coundi. Inc.
The Education Finance Council ("EFC") is a noi-for-profit association organized to
promote ttie conunon interests of tax-exempt education loan secondary market organizanons
whose mission is to maimain and expand student access to higher education oppominities by
ensunng the availability of tax-exempt funding for education loans and fulfilling the resource
needs of students and families pursuing post-secondary education. EFC. while only formed
in December. 1992. cunemly represents the 23 nonprofit state-based secondary markets
which are listed below.
As of December 31. 1992, nonprofit state secondary markets held at least SI2 billion.
or approximately 20%. of all outstanding FFEL Program Loans.
Arkansas Studem Loan Authority
California Higher Education Loan Authority. Inc.
Central Texas Higher Education Authority. Inc.
CitiState Advisors on behalf of LA Public Facilities Authority
Colorado Student Obligation Bond Authority
Greater East Texas Higher Education Authority
Illinois Student Assistance Commission/IDAPP
Iowa Student Loan Liquidity Corporation
Maine EdtuMtional Loan Marketing Corporation
Michigan Higher Education Student Loan Authority
Mississippi Higher Education Assistarxe Corporation
Missouri Higher Ediuxuion Loan Authority
Montana Higher Education Student Assistance Corporation
Nebraska Higher Education Loan Program. Inc.
North Texas Higher Education Authority. Inc.
New Jersey Higher Education Assistance Authority
Panhandle Plains Higher Education Authority
Pennsylvania Higher Education Assistance Agency
Southwest Texas Higher Education Authority, Inc.
The Studem Loan Funding Corporation
Utah Higher Education Assistance Authority
Vermont Student Assistance Corporation
Volunteer State Student Funding Corporation
1148
Mr. KOPETSKI. I want to remind the panelists that we have seven
panels today. I know some of you probably have airplanes at 5
o'clock that you would want to catch after your testimony. If we
could adhere as closely as possible to the 5-minute rule, we will all
make our airplanes and other places that we have to be later this
afternoon.
With that, we have Mr. Uvena. Welcome.
STATEMENT OF FRANK UVENA, SENIOR VICE PRESIDENT,
LAW AND CORPORATE STAFFS, R.R. DONNELLEY & SONS
CO., CfflCAGO, ILL.
Mr. Uvena. I am Frank Uvena, senior vice president, law and
corporate staffs of R.R. Donnelley & Sons Co. As such, I have held
responsibility for employee benefits, and for human resources. I am
not a tax expert.
R.R. Donnelley is a leader in managing, reproducing and distrib-
uting print and digital information services, worldwide. We are 129
years old. Our total current employment is 32,000, mostly in the
United States. More than 11,500 of our employees have been with
us for more than 10 years.
I appreciate the opportunity to appear before you today to offer
my company's view on an issue of importance to us. I would also
like to thank Congressman Reynolds for helping us bring this mat-
ter before you.
I am here to propose that the committee consider the reinstate-
ment of a tax credit that was in effect until 1987. That provision
allowed employers a tax credit of three-quarters of 1 percent of the
compensation due to employees provided that the entire amount
was contributed to an employee stock ownership plan to purchase
stock to be distributed only to employees. This particular variety
was known as a PAYSOP. The tax credit was initiated by Congress
to encourage widespread stock ownership by employees of Amer-
ican companies. Our company adopted this plan in 1981. Our plan
was designed for the broadest possible employee participation. We
made it available to everyone with at least 1 year's full service, and
we paid all costs of administration to ensure that the entire credit
would be used only to acquire stock. The plan was so popular that
by 1987 75 percent of our full-time employees in the United States
were participating and held over 1,750,000 shares they had re-
ceived through the PAYSOP.
It is clear the PAYSOP tax credit, as it existed in 1986, was an
important contribution to employee morale, an effective way of en-
hancing commitment, of encouraging employees to feel a relation-
ship beyond employee-employer, to feel a real sense of ownership
in the company.
I believe this was Congress' intent in enacting the program in
the first place. It clearly worked at Donnelley. It worked because
it was available to all employees. It worked because it was simple
in operation. It worked because it was easy to understand, and,
most important, it worked because it benefited employees directly.
I know our employees were surprised and disappointed by the Gov-
ernment's decision to drop the program after 1986. We discon-
tinued further funding of the program in 1987 when tax credits
were no longer available. This decision underscores a fundamental
1149
point which I would hke to emphasize. We have never considered
the PAYSOP plans as in way a substitute for retirement benefits
or for other employee benefits generally.
If the Congress sees fit to reinstate the program, we will partici-
pate enthusiastically, but we have no intention of using it to re-
place any employee benefits now in place. The change will benefit
our employees only. It will not add a penny to Donnelley's earn-
ings.
Let me now address the PAYSOP issue in a somewhat broader
context. All of us know that American businesses are participants
in a highly competitive global economy. It is essential all employees
be empowered to think and act much like business owners. We feel
strongly stock ownership can help to foster such an attitude and
reward such work and sacrifice.
We all know in an effort to remain competitive and productive
in a global marketplace, American businesses have sharply reduced
the number of middle managers and, indeed, the number of core
employees generally. This makes it all the more important all em-
ployees see themselves as partners in the business.
Let me summarize. The overall goal of our proposal is to put
stock into the hands of all employees. This will help foster an atti-
tude of ownership, a long-term view of employment and its bene-
fits, and therefore, ultimately, higher productivity.
Past experience demonstrates that the PAYSOP was an effective
mechanism for sharply increasing stock ownership by all employ-
ees. It was easy to understand, simple to administer, and all its
benefits flowed directly to the employees.
We ask for reinstatement of the PAYSOP tax credit which ex-
isted prior to the Tax Reform Act of 1986. Your staff will shortly
provide an estimate of the revenue impact of this proposal. Al-
though clearly preferring and strongly recommending reinstate-
ment of the credit as it existed in 1986, we do suggest several other
options the committee may want to consider. They are set forth in
my written statement.
In conclusion, what we advance here today will allow our Gov-
ernment to reinstate a simple, proven and effective mechanism for
substantially increasing stock ownership among the working people
of America. This in turn will make a major contribution to Ameri-
ca's economic prospects for the future.
Thank you for your time and attention.
Mr, KOPETSKI. Thank you very much for your testimony.
[The prepared statement follows:]
77-130 0 -94 -5
1150
TESTIMONY OF FRANK J. UVENA
R.R. DONNELLEY & SONS CO.
Good Morning Mr. Chairman, Members of the Committee -
My name is Frank Uvena. 1 eua Senior Vice President, Law and
Corporate Staffs, of RR Donnelley & Sons Company. As such, I
have held responsibility for employee benefits, for human
resources and for corporate staff functions which emphasize high
employee involvement and quality management.
RR Donnelley is a leader in managing, reproducing and
distributing print and digital information services world wide.
As the world's largest commercial printer, we produce catalogs,
newspaper advertising inserts, magazines, books, directories,
financial printing and computer documentation. Our total current
employment is about 32,000, with most of our employees in the
United States.
I very much appreciate the opportunity to appear before you
today to offer my company's view on an issue of importance to us.
I am here to propose that the Committee consider the
reinstatement of a tax credit that was in effect until 1987.
That provision allowed employers a tax credit of 0.75% of the
compensation due to employees, provided that the entire amount
was contributed to an Employee Stock Ownership Plan, to purchase
stock to be distributed only to employees. This particular
variety was known as a PAYSOP. The tax credit was initiated in
1981 to encourage wide-spread stock ownership by the employees of
all types of American companies.
My company adopted such a plan in 1981. From the beginning,
our plan was designed for the broadest possible employee
participation. We made it available to everyone with at least
one full year of service, and we paid all costs of administration
to ensure that the entire credit would be used only to acquire
stock. The plan was so popular that by 1987 some 75% of all of
our full time employees in the United States were participating.
At that time our employees held 1,752,220 shares they had
received through the PAYSOP.
Our employees understood and appreciated the stock ownership
rights obtained under the program. For generations at Donnelley,
members of senior management have met with all employees
regularly to discuss the state of the company and to receive
employee questions, comments and criticisms. As one of the
Donnelley executives regularly involved in these meetings, I know
that employees frequently asked questions about their benefits
and rights under the PAYSOP plan. I know it gave them an
important feeling of ownership, of partnership in their company.
I can also testify they were sujrprised, dismayed and disappointed
when this benefit was no longer available after 1986. They
simply never understood why it was discontinued by the
government .
Based on our objective statistics on employee participation,
and the personal experience which I have just described, which
was shared by my colleagues in the senior management of the
company, it was clear the PAYSOP tax credit as it existed in 1986
was an important contribution to employee morale and an effective
way of enhancing commitment, of encouraging employees to feel a
relationship beyond employee-employer, to feel a real sense of
ownership in their company. I believe this was Congress's intent
in enacting the program in the first place. It clearly worked at
Donnelley. It worked because it was available to all employees,
simple in operation, easy to understand and, most important,
benefitted employees directly.
We discontinued further funding of the program in 1987 when
tax credits were no longer available. As I mentioned, at that
time approximately 75% of our employees in the United States were
participants in the plan and thereby Donnelley stock holders.
One might well ask why Donnelley withdrew from the program
entirely at that time, when, as you know, a number of provisions
permitting Employee Stock Ownership Plans remained in the law,
and are indeed still there today? This is a fair question. In
our view, the remaining provisions governing ESOPs are intended
to serve purposes quite different from that of the plan in which
we participated. Some such provisions were intended to apply
primarily to closely held corporations and their stockholders.
Other provisions allowing for an effective deduction of ESOP loan
1151
payments helped facilitate stock buyouts on a highly leveraged
basis. Finally, some companies used ESOP incentives to radically
change their benefit structure for employees, so as to feature an
ESOP as the predominant benefit available.
In short, as the law currently stands, the ESOP tax
incentives are designed to further the business purposes of
certain corporate entities and their stockholders by providing
favorable means of transferring shares, obtaining less costly
financing or a less expensive package of benefits.
We of course have examined and carefully considered these
possibilities. The first two clearly did not apply to us. with
respect to benefit packages, we already had what we regarded as
an extraordinarily attractive benefit package, that was
understood by and effective for, our employees generally. We saw
no reason to change it.
This decision underscored a fundamental point which I should
like to emphasize. We never considered the PAYSOP plans as in
any way a substitute for retirement benefits or for other
employees benefits generally, and we do not do so now. If the
Congress sees fit to reinstate the program, we will participate
enthusiastically, but we have no intention of using it to replace
any employee benefits now in place. The change will benefit our
employees only; it will not add a penny to Donnelley's earnings.
I should now like to take a moment to place the PAYSOP issue
in a somewhat broader context. All of us know that we are
participants in a highly competitive global economy. If
individual American companies and American industry generally are
to remain competitive in the world marketplace, we must
anticipate customers' needs, respond to those needs more quickly,
deliver the quality the customers demand, and do all of this at a
very competitive price. We feel that this sort of response, with
the needed level of innovation and quality control, is
impossible, unless we empower our hourly employees to participate
fully in the operation of the company. This revolutionary new
corporate culture often requires our employees to think and act
and make sacrifices much like those of a small business owner.
We feel strongly that to foster such an attitude and to reward
such work and sacrifice, all employees should actually be owners,
and participate in the long-term benefits of stock ownership.
You gentlemen all know that in an effort to remain
competitive and productive in a global marketplace, American
business has sharply reduced the number of middle managers and,
indeed, the number of core employees generally. The wide-spread
anxiety and pain resulting from this unavoidable process make it
all the more important that our employees generally see
themselves as partners in the business, feel that they have a
real stake beyond, although certainly not instead of, the regular
pay check. At this point you might ask: This is very persuasive.
It sounds like an excellent program. So, why don't you just go
ahead and do it? Why are you here talking to us? To answer that
question, I must again emphasize the rigorous competitiveness of
the environment in which we operate. Our wage levels rank near
the top of our industry and compare very favorably to industry
generally. Our employee benefits, such as insurance, healthcare,
and a fully funded retirement plan, are, we think, generous. In
view of the very narrow profit margins under which we must
operate in these difficult days, we cannot afford to do more.
Most companies have gone through or are going through
dramatic and difficult changes to reduce their costs and remain
competitive. Adding additional costs is simply not an option for
such companies in today's economic environment.
Many employees are struggling to maintain their standard of
living. They could not easily accept a conversion of their
current cash compensation to mostly cash with some employers'
stock. It follows that in the current environment, broadened
employee stock ownership will not occur without significant
support by the United States government.
Let me summarize.
The purpose;
The overall goal is to put stock into the hands of all
employees. This will help to foster an attitude of ownership, a
1152
long term view of employment and its benefits, and therefore,
ultimately, higher productivity.
Past experience demonstrates that the PAYSOP was an
effective mechanism for sharply increasing stock ownership by
rank and file employees. It was easy to understand, simple to
administer, and all its benefits flowed directly to the
employees.
ESOP provisions in the current Internal Revenue Code focus
on more narrow, targeted groups, such as closely held
corporations, LBO's and corporations needing to restructure their
benefits plans. As a result, ESOP, as it appears in the current
law, is really oriented to favor the corporate entity or
investment community. This is not our purpose.
Our Proposal
We ask for reinstatement of the 0.75% PAYSOP tax credit
which existed prior to the TAx Reform Act of 1986. It was
formerly codified as Sec. 44G of the Internal Revenue Code of
1954.
Some revenue impact from such a program is inescapable. It
is our understanding that the staff of this Committee hopes to
have available an estimate of the amount of this impact on or
about September 14th, so it is pointless for me to speculate at
this juncture as to what those numbers might be. However, in
order to limit the revenue impact of this proposal RR Donnelley,
although clearly preferring and strongly recommending
reinstatement of the credit as it existed in 1986, is suggesting
several options the Committee may want to consider. All of them
will achieve the primary goal, the increase of stock ownership by
lower compensated employees.
Option One - Limit the contribution and tax credit to
$450 per employee. This figure is derived by limiting
the contribution to 0.75% of compensation up to a
maximum of $60,000.
Option Two - Limit the credit to the compensation only
of "non-highly compensated" employees. The definition
of such employees would be that presently set out in
the Internal Revenue Code.
Option Three - Provide the 0.75% tax credit, but
require a distribution of stock from the plan to each
employee within four years of the contribution by the
employer. This would trigger taxation to the employee
on the value of the stock as of the date of
distribution, and therefore reduce the tax loss to the
government .
Option Four - Reduce the tax credit to 0.5% of
compensation, the provision which was in effect for the
tax years 1983 and 1984. To limit the revenue impact
further. Option Four could be combined with Option One
or Two and Three.
We believe that Options One and Two are essentially inter-
changeable and are clearly preferable to Options Three and Four.
They provide different ways to approach the same issue. The
third option is least preferred because it would have the effect
of reducing the amount of stock held by employees in the long
term.
Conclusion
The proposals advanced here will allow our government to
reinstate a simple, proven and effective mechanism for
substantially increasing stock ownership among the working people
of America. When combined with sweeping internal corporate
changes, variously termed high employee involvement or employee
empowerment, the proposal will significantly improve
productivity. This, in turn, will make a major contribution to
America's economic prospects for the future.
1153
Mr. KOPETSKI. Mr. Romeo.
STATEMENT OF RICHARD P. ROMEO, CHAIRMAN, TAX COM-
MITTEE, AMERICAN FINANCIAL SERVICES ASSOCIATION,
AND VICE PRESIDENT AND GENERAL TAX COUNSEL,
AMERICAN EXPRESS TRAVEL RELATED SERVICES CO., INC.,
NEW YORK, N.Y.
Mr. Romeo. Thank you, Mr. Chairman and members of the sub-
committee. I am Richard P. Romeo, vice president, general tax
counsel of American Express Travel Related Services Co., Inc., in
New York.
Today, I am testifying on behalf of the American Financial Serv-
ices Association (AFSA), which is the Nation's largest trade asso-
ciation representing nonbank providers of consumer financial serv-
ices.
We have a more detailed written statement that we would like
to submit for the record.
Today, we appreciate the opportunity to testify in support of a
proposal to clarify when a debt will be considered worthless for tax
purposes so that a deduction may be obtained. AFSA urges your
support for this proposal since it would achieve substantial sim-
plification of current law, would assure that taxpayers in similar
businesses will be treated similarly for tax purposes, and would
have little or no adverse revenue impact.
Under current law, deductions for bad debts are allowed only in
the year in which the debts become worthless. For companies like
AFSA members, which typically have a high volume of relatively
small loans and receivables, proving worthlessness on a loan-by-
loan basis is a cumbersome and time consuming, if not impossible,
task.
For regulated financial institutions such as banks and thrifts,
Treasury regulations now afford a conclusive presumption allowing
conformity of financial accounting and tax treatment for worthless
debts. No such standard applies to unregulated creditors such as
AFSA members, even though they compete with regulated lenders
and hold similar loans and receivables.
In connection with the repeal of the reserve method by the Tax
Reform Act of 1986, Congress directed the Treasury Department to
study and issue a report on bad debt deductions. In its report,
Treasury acknowledged the fundamental similarities between
banks and nonbank financial services companies, and the problems
that nonbanks face without a similar bad debt standard.
One approach considered by Treasury for nonbank creditors
would be to determine worthlessness for tax purposes by reference
to the standards set by bank regulatory authorities. Treasury's
evaluation of this approach was largely favorable, and it was deter-
mined to involve an insignificant revenue effect. However, Treasury
concluded that extending a book- tax conformity rule to creditors
other than regulated lenders should be introduced with congres-
sional approval rather than by unilateral regulatory action.
It is important to note that the proposed rule would not impose
a book-tax conformity rule for all bad debt deductions. Rather, it
would apply only with respect to those types of debts for which
bank regulators prescribe specific, objective rules that can be read-
1154
ily applied by taxpayers and the Internal Revenue Service. This
would have the effect of limiting the presumption to those low bal-
ance, high volume loans and receivables for which the administra-
tive burdens of proving worthlessness on a loan-by-loan basis are
most readily apparent.
The Treasury Department has raised concerns about this pro-
posal for reasons that appear to give insufficient weight to the
basic principle of competitive equality that underlies AFSA's sup-
port. We are confident that Treasures concerns may be satisfied.
First, the current book-tax conformity rule for banks and other
regulated institutions was found by Treasury in its report on bad
debts to be supported by general tax principles and not by any spe-
cial status of regulated entities.
Second, the use of specific, objective criteria for worthlessness,
such as the length of delinquency, in the case of consumer install-
ment loans and credit card debt, would help assure that chargeoff
standards will be uniform for all creditors with similar types of
loans and be relatively easy to administer for both taxpayers and
the IRS.
Third, the oversight and expertise regulators bring to this issue
is embodied almost entirely in establishing the objective chargeoff
criteria and not in performing detailed audits, thus making moot
the absence of regulatory oversight of other taxpayers that seek to
apply those same rules.
Finally, AFSA maintains that unregulated creditors would be no
more prone to take advantage of a book-tax conformity rule to ac-
celerate tax deductions than would their regulated competitors. In
any event, the ability to accelerate chargeoffs would be precluded
since bad debt deductions would be allowable no earlier than the
time specified in the appropriate regulatory guidelines.
In conclusion, I would like to thank the chairman and the mem-
bers of the subcommittee for their attention this morning. My own
company as well as other members of AFSA are interested in this
and other pending tax legislative proposals that raise a similar
issue regarding comparable tax treatment for competitors in the fi-
nancial services industry.
We appreciate the opportunity we have had to meet with con-
gressional and Treasury staff to discuss this issue, to provide infor-
mation regarding our industry and to attempt to develop a work-
able rule that reflects sound tax policy. We look forward to continu-
ing to work with you and the staff on these issues as the legislative
process progresses.
Mr. KOPETSKI. Thank you for your testimony.
[The prepared statement follows:]
1155
AMERICAN FINANCIAL SERVICES ASSOCIATION
TESTIMONY REGARDING BAD DEBT DEDUCTIONS OP NON-BANK CREDITORS
SUBCOMMITTEE ON SELECT REVENUE MEASURES OF THE
HOUSE WAYS AND MEANS COMMITTEE
SEPTEMBER 8. 1993
Introduction
Good morning, Mr. Chairman and members of the Subcommittee. My
name is Richard P. Romeo, Vice President - General Tax Counsel of American
"Express Travel Related Services Company, Inc.
Today, I am testifying on behalf of the American Financial Services
Association (AFSA). AFSA is the nation's largest trade association representing
non-bank providers of consumer financial services. Organized in 1916, AFSA
represents 367 companies operating 10,910 offices engaged in extending over
$200 billion of consumer credit throughout the United States. These companies
range from independently-owned consumer finance offices to the nation's
largest financial services, retail, and automobile companies. Retail and
automobile credit is extended through thousands of stores and dealers.
Consumer finance companies hold over $150 billion of consumer credit
outstanding and $67 billion in second mortgage credit, representing one
quarter of all consumer credit outstanding in the United States.
We appreciate this opportunity to testify in support of a proposal to clarify
when a debt will be considered worthless for tax purposes so that a deduction
may be obtained. In general, the proposal would allow creditors with a high
volume of low balance, homogeneous loans to establish worthlessness by
reference to the standards that have been provided for banks and other
regulated institutions. AFSA's support for this proposal is based upon the belief
that it would achieve substantial simplification of current law, would assure that
taxpayers in similar businesses will be treated similarly for tax purposes, and
would have little or no adverse revenue impact.
WhY New Lgglslqtten gn Pqd Pgbt Pgductions Is NgcessqrY
The need for new legislation in this area stems from the repeal of the
reserve method for bad debts by the Tax Reform Act of 1986. Under the reserve
method, deductions had been allowed for oddifions to a reserve for bad debts
for charge-offs that were expected to occur in the future.
Since the repeal of the reserve method, deductions for bad debts have
been allowed only in the year in which the debts become worthless (or
worthless in port) and charged off. For companies like AFSA members, which
typically have a high volume of relatively small loans and receivables, proving
worthlessness on a loan-by-loan basis is a cumbersome and time consuming, if
not impossible task. In addition to the resources required on the port of both
taxpayers and the Internal Revenue Service in audits of bad debt deductions,
taxpayers face the risk that the IRS would propose disallowances of claimed
deductions that may not be easily disproven on a loan-by-loan basis.
1156
For regulated financial institutions such as banks and thrifts. Treasury
regulations now afford a conclusive presumption allowing conformity of
financial accounting and tax treatment for worthless debts. There is no such
standard that applies to unregulated creditors such as AFSA members, even
though they compete with regulated lenders and hold similar loans and
receivables. In our view, this disparity in treatment of similarly situated taxpayers
is unnecessary and unfair, and this legislative proposal is on appropriate
response to the problem.
Thg Trggsmry Pgpqrtmgnt Rgpcrt tg thg Conqrg?? on Pod Pebt?
In connection v^th the repeal of the reserve method for bad debts in
1986, Congress directed the Treasury Department to study and issue a report on
"appropriate criteria to be used to determine if a debt is worthless' for tax
purposes, and to "consider under what circumstances a conclusive or
rebuttable presumption of the worthlessness of an indebtedness is appropriate"
(H. R. Conf. Rep. No. 841 , 99th Cong. 2d Sess. II -316 (1986)).
While AFSA closely monitored the progress of the Treasury Department
study and was even afforded the opportunity to provide input concerning the
business of its members, the conclusions and recommendations that resuited
from the studf essentially left our industry in limbo.
In its report ("Report to the Congress on the Tax Treatment of Bod Debts
by Financial Institutions", Department of the Treasury, September 17, 1991)
(hereinafter "Treasury Report"), Treasury defended the book-tax conformity rule
that applies to regulated lenders on the ground that "the regulatory and tax
definitions of assets that should be charged off are quite similar in that they are
both based on apparent uncollectibility, notwithstanding the p>ossibility of partial
recovery at some time in the future" (Treasury Report, page 22).
While noting that the book-tax conformity approach was available only
to regulated lenders. Treasury did acknowledge the fundamental similarities
between the lending activities of non-bank financial sery/ices companies and
banks, and the problems that non-banks face without a similar bod debt
standard:
"These nondepository institutions resemble regulated lenders in a
number of ways. They typically hold large portfolios of
homogeneous loan receivables. Like large banks, they ore not
permitted to use the reserve method in computing the deduction
for bad debts. As a consequence, they face similar difficulties in
evaluating the quality of assets in their portfolios on a loan-by-loan
basis for purposes of determining their bod debt deductions. But
because they are not subject to the regime of state and federal
regulation that governs depository institutions, the conclusive
presumption allowing conformity of tax and book treatment of
worthless debts is not available to them. Therefore, in the absence
of the reserve method, these taxpayers must use the specific
charge-off method for deducting worthless debts and support such
deductions with 'all F>ertinent evidence' if challenged by the
Internal Revenue Service.
In view of many similarities between these unregulated
lenders and depository institutions and the burdens imposed by the
ioan-by-loan analysis required under the specific charge-off
method, it is worthwhile to consider whether such lenders should
1157
have some sort of book/tax conformity rule now availoble to bonks
and thrifts." (Treasury Report, page 29)
Treasury expressed the view that because of the absence of regulatory
oversight, a book-tax conformity rule for such creditors should be qualified by
some additional standard to deter overly aggressive charge-off policies to
obtain tax advantages. Among the various approaches that could be used in
'developing a proxy for regulatory oversight" is the so-called "identical
standards" approach, which most closely approximates the proposal under
consideration. Under this approach, the determination of worthlessness for tax
purposes of particular types of debts held by any creditor, whether or not
regulated, would be determined by reference to the standards sefby bank
regulatory authorities. Treasury's evaluation of this method was largely
favorable:
The identical standards approach is appealing in that it adopts
identifiable objective standards for determining worthlessness and
seeks to create parity between the treatment of regulated and
unregulated lenders with respect to similar types of loans ....
(W)e believe the substance of this proposal may provide a
promising basis for the development of a workable conformity rule
and would have on insignificant revenue effect." Creasury Report,
page 31)
Treasury concluded that extending a book-tax conformity rule to creditors
other than regulated lenders would be a departure from settled policy and
practice that should be introduced with Congressional approval rather than by
unilateral regulatory action. This is what prompted the introduction of the
legislative proposal now under consideration.
How the Proposed Rule Would Operate
tt is important to note that the proposal would not impose a book-tax
conformity rule foroU bad debt deductions. Rather, a conclusive presumption
of worthlessness would be provided only with respect to those types of debts for
which bank regulatory authorities hove prescribed specific, objective rules that
can be readily applied by taxpayers and the Internal Revenue Service. To the
extent that regulatory authorities require an examination of all facts and
circumstances relating to a particular loan, rather than such objective criteria,
there would be no presumption of worthlessness based upon book-tax
conformity. This would have the effect of limiting the presumption to those low
balance, high volume loans and receivables for which the administrative
burdens of proving worthlessness on a loan-by-loan basis are most readily
apparent.
Thus, the Treasury Report notes that the Comptroller of the Currency's
Handbook for National Bank Examiners adopts mechanical, automatic charge-
off procedures for high-volume loans (such as consumer installment loans, credit
card plans, and check credit plans) that look solely to the time the debt has
been delinquent. Similar rules regarding "consumer credit" have been
promulgated by the Office of Thrift Supervision (12 C.F.R. § 561). Instead of
performing a loan-by-loan review, a bank examiner confirms that the proper
automatic charge-off procedures have been adopted and followed. Use of a
similar approach by IRS auditors examining nondepository financial services
companies would significantly diminish audit burdens for both taxpayers and
the IRS and bring much-needed certainty to the issue of deductions for
worthless debts. In addition, it is important to note Treasury's conclusion that
1158
basing a book-tax conformity rule for nondepository providers of consumer
financial services on an "identical standards" approach "would have an
insignificant revenue effect."
The approach of bank regulators in determining worthlessness on the
basis of a single fact, ler>gth of delinquency, may appear to depart from tax
precedents calling for consideration of "all p>ertinent evidence." However,
Treasury noted that the unsecured nature of most consumer debt "may cause
that single fact to be an adequate measure of worthlessness for tax purposes.
In any event, the high volume of such loans and their comparatively low face
value would moke an in-depth inquiry into all relevant facts and circumstances
a very burdensome task for the lending institution" G'reasury Reportrpage 23).
Response to Treasury Department Concerns About the Proposal
The principle that underlies AFSA's support for this proposal is that there
should not be a disparity in the tax rules for bad debt deductions applicable to
competitors in the financial services industry based solely upon whether or not a
taxpayer is regulated for norv-tax purposes. In this regard, we note that the
Treasury Department has submitted testimony in opposition to the proposal for
reasons that appear to conflict v^flth this basic principle of competitive equality.
We are confident that Treasury's concerns may be satisfied, and we would like
to address those concerre for the record at this time.
The written comments on this issue submitted to this Subcommittee on
June 22, 1993 by Assistant Secretary of the Treasury (Tax Policy) Leslie B. Samuels
provided as follows:
"The rules concerning bad debts of federally regulated financial
institutions recognize their special status which is not shared by non-
federally regulated institutions. There are no assurances in the case
of unregulated lenders that the debts will be worthless under
general tax principles when charged off for book purposes, or that
uniform charge-off standards will be applied. In addition, the
absence of federal regulatory oversight provides unacceptable
opportunities for distortions, particularly in the form of accelerated
charge-offs."
The concerns expressed by Assistant Secretaiy Samuels were in large part
addressed in the Treasury Department's own report to the Congress on bad
debt deductions cited earlier in this statement. Thus, the special book-tax
conformity rule that now applies with respect to the bad debt deductions of
banks and other regulated institutions is not based merely upon their "special
status" as regulated entities. Rather, Treasury viewed that rule as jusfified by the
fact that "the regulatory and tax definitions of assets that should be charged off
are quite similar in that they are both based upon apparent uncollectibility,
notwithstanding the F>ossibility of partial recovery at some time in the future"
(Treasury Report, page 22). Even where a single fact, the length of
delinquency, determines worfhiessness for regulatory purposes of consumer
installment and credit card debt, Treasury was satisfied that "it is appropriate to
permit the regulatory loss classification to determine the worthlessness of such
debts for tax purposes" (Treasury Report, page 23).
In short, even though regulators might be expected to have a more
conservative approach to bad debt charge-offs than tax auditors. Treasury
concluded that the regulatory criteria were in fact consistent with the "general
tax principles" referred to by Assistant Secretary Samuels. We submit that this
1159
should be true whether or not the particular taxpayer whose debts the criteria
are applied to is regulated.
We believe that the concern that the charge-off standards to be applied
should be "uniform' would be satisfied by the relatively limited scope and terms
of the proposed rule. As stated earlier, the rule should apply only to those
sp>ecific types of debts characterized by their relatively high volume and low
balances for which regulators prescribe specific, objective criteria for
worthlessness (such as the length of delinquency, in the case of consumer
installment loans and credit card debt). In the cose of other types of loans for
which a more subjective, "facts and circumstances" analysis is made by
regulators, there would be no book-tax conformity presumption. Relying solely
up>on objective criteria should alleviate any concern regarding uniformrty.
The concern that the absence of federal regulation presents
unacceptable opportunrties for tax avoidance overstates the role regulators
perform with respect to the types of loans in question. Instead of a loan-by-loan
review, an on-site examination of a bank by a regulator is limited to "confirming
that the proper automatic charge-off procedures have been adopted for
installment and credit card loons" (Treasury Report, page 16). Thus, the
oversight and expertise regulators bring to this issue is embodied almost entirely
in establishing the objective charge-off criteria that may be applied to loans
held by any creditor, whether regulated or unregulated. The absence of
detailed regulatory audits with respect to such loans tends to make moot the
absence of regulatory oversight of other taxpayers that seek to apply those
same rules. Further, the relatively streamlined audit inquiry into whether an
institution's charge-off procedures comply with objective regulatory standards
confirms the administrative advantages of this approach and responds to the
administrative concerns Assistant Secretary Samuels cited in his oral testimony.
AFSA maintains that unregulated creditors would be no more prone to
take advantage of a book-tax conformity rule to accelerate tax deductions
than would their regulated competitors. Unregulated finance companies, like
banks, need to report strong earnings to maintain their good standing wrth debt
rating agencies, creditors and shareholders. In any event, since bad debt
deductions would be allowable no earlier than the time specified in the
appropriate regulatory guidelines, the ability to accelerate charge-offs to
obtain earlier tax deductions for bad debts would be precluded.
Assistant Secretary Samuels also stated that smaller, privately-held lenders
would be disadvantaged if the proposal would apply only to their publicly-held
competitors. AFSA agrees with this concern. A tax standard for bad debt
deductions that is based upon objective criteria set forth by bank regulators
should be available to all taxpayers, regardless of whether they are public or
private, regulated or unregulated.
I would like to thank the Chairman and the members of the
Subcommittee for their attention this morning. My own company as well as
other members of AFSA are interested in this and other pending tax legislative
proposals that raise a similar issue regarding comparable tax treatment for
competitors in the financial services industry. We appreciate the opportunity
we have had to meet with Congressional and Treasury staff to discuss this issue,
to provide information regarding our industry and to attempt to develop a
workable rule that reflects sound tax policy. We look forward to continuing to
work with you and the staff on these issues as the legislative process progresses.
1160
Mr. KOPETSKI. I want to begin questioning with Mr. OToole.
Organizations such as Nellie Mae have been subsidized gener-
ously by Federal tax benefits in the past. Now you feel that you
could better serve the needs of student borrowers by converting to
for profit status. Why the change in philosophy?
Mr. OToole. Thank you, Mr. Chairman.
Organizations such as ours have been nonprofit organizations
from the start as required by the code. All of the earnings or the
accumulation of net assets that have been created over that period
of time, since the beginning of those organizations' existence, would
stay within those organizations and be dedicated to nonprofit pur-
poses, broader nonprofit purposes, than just the Federal student
loan programs but still purposes associated with fostering edu-
cational opportunity in a nonprofit sense.
Our suggestion is that in order to meet the student loan funding
needs during the 4-year transition period that we be permitted to
establish a successor corporation under the rules and restrictions
set out in H.R. 2603. We are expecting that under the current law
private lending will be phased down from the current program vol-
ume, but that demand will not change. We are expecting that orga-
nizations such as ours, that are among the largest providers of stu-
dent loan capital in the country which support Federal programs,
will be called upon to provide still greater levels of student loan
funding in response to phase down of private funding. With the
changes to the current program enacted by the Congress and devel-
oped by the education committees, there will be greater difficulty
during the transition in raising funds sufficient to meet the student
loan capital needs because of the reductions in yields and the
greater risk sharing associated with student loans. Thus, we are
looking for an opportunity to be able to strengthen the balance
sheet of our organizations by injections of equity investment that
would allow us to then leverage that equity investment to greater
levels of debt financing to meet those student loan capital needs in
support of the student loan program during the transition.
Mr. KOPETSKI. Mr. Hoagland, do you have any questions of Mr.
OToole?
Mr. Hoagland. Not of Mr. OToole.
Mr. KOPETSKI. Mr. Uvena, under your proposal there would be
a great expansion of ESOPs as a means of providing employee re-
tirement benefits. Prior laws which provided tax favored treatment
for ESOPs resulted in providing greater tax benefits to employers
and others engaged in ESOP transactions without ensuring in-
creased rights of ownership for participating employees. Can we ex-
pect to see a recurrence of similar concerns under your proposal?
Mr. UvENA. I would hope not. There are other laws governing
ESOPs which remain and serve legitimate purposes. What we sug-
gest, it be reinstated is a very narrow one directed just to provide
stock to employees. In our company we have a fully funded defined
benefit retirement plan which will not change, which did not
change during this period of time. In fact, it was very clear that
this was a tax funded benefit and that was clearly communicated
to our employees. It was never a substitute for compensation, for
retirement or any other benefits.
Mr. KoPETSKL I see.
1161
Mr, Romeo, are members of your association prepared to accept
other tax rules applicable to your competitors in the financial serv-
ices area? For example, the recently passed budget reconciliation
bill contains a provision that would require banks and thrifts to re-
port to the IRS wnth respect to discharges of indebtedness in excess
of $600. Would you object if this reporting requirement were ex-
tended to all companies engaged in the business of making loans?
Mr. Romeo. We are very much aware of that provision. It was
added in the recently enacted bill, and it only applies to regulated
institutions. While we believe that there is an insignificant revenue
effect with regard to the bad debt proposal, we think extending the
reporting requirement would be consistent with the idea of com-
petitive equality and parity so that the same rule should apply.
In fact, many of us have regulated institutions within our con-
solidated groups and do in fact have to comply with that rule as
to those entities anyway. We think an extension of the rule would
be consistent with the principle that underlies our support for the
bad debt rule. So, yes, Mr. Chairman, we have seen it linked.
There is not necessarily a quid pro quo between the bad debt and
information reporting proposals, but they certainly stem from the
same principle of treating all competitors in the financial services
industry on a level playing field.
Mr. KOPETSKI. I appreciate your openness. Mr. Hoagland.
Mr. Hoagland. Let me say, Mr. Romeo, that I am pleased that
you specifically addressed Treasury's concerns in your testimony.
Mr. Samuels indicated reservations earlier, and you have ad-
dressed those reservations and I concur with your analysis.
Let me indicate that my staff is currently working with Amer-
ican Express and other members of the association together with
Joint Tax to gather the information necessary to develop legislation
that will satisfy Treasury and at the same time provide a method
that will permit nonbank lenders to establish the worthlessness of
low balance, homogeneous loans by reference to standards similar
to those that have been provided for banks and thrifts. I think we
ought to be able to do it, don't you?
Mr. Romeo. Yes, sir. I thank you for your interest in this issue
and your efforts in getting it into the legislative arena and under
discussion at this time.
Mr. Hoagland. We have a rule for regulated institutions, banks
and thrifts that works well, and I think there is no reason we can't
extend that to nonbank institutions.
Mr. Romeo. In that regard I wish to emphasize that we are not
talking about a blanket, across-the-board parity rule under which
whatever is deductible for book purposes should be deductible for
tax purposes. We are talking about a more limited class of loan, the
relatively low balance, high volume situation. Some of our compa-
nies, like banks, have millions of these types of accounts, such as
consumer installment loans, credit card debt, et cetera. The ability
to be able to look at those on a loan-by-loan basis is simply an im-
possible task.
Those are the type of loans for which regulators have specified
some fairly workable rules that can be applied by anybody who has
that type of loan. That is essentially the standard we are seeking
to adopt here and have available for tax purposes.
1162
Mr. HOAGLAND. It would simplify the process for IRS and all
companies involved?
Mr. Romeo. Yes, sir. We think it is very much a step toward ad-
ministrative simplification. Having a bright line test, while it may
be rough in some regard, certainly would be easier to administer,
minimize audit burdens, and minimize the time and resources and
effort that has to be expended by both taxpayers and IRS in audit-
ing this type of issue.
Mr. HOAGLAND. I don't think it is in the interest of IRS or the
industry to be required to determine the worthlessness to these
loans on a loan-by-loan basis and we can and should move to a
more efficient system.
Mr. Romeo. We agree and appreciate your support for that effort.
We certainly do think it is very much an open issue. There are
some details that we need to work out with congressional and
Treasury staff and we certainly are very eager to continue with
that process.
Mr. HOAGLAND. Let's hope we can get it done. Thank you, Mr.
Chairman.
Mr. KOPETSKI. I thank the panelists and thank vou for your ex-
pert advice and opinion and written testimony and brevity.
We will now move to the next panel, panel three out of seven
panels today. We will move to the advertising arena with the Com-
mittee for Competition Through Advertising, Gerald Gibian, Cor-
porate Vice President, Tax and Real Estate, Estee Lauder Co.,
N.Y.; the Ad Hoc Group to Preserve Deduction for Advertising,
Mark McConaghy, former chief of staff of the Joint Committee on
Taxation; and the Advertising Tax Coalition, Timothy White, pub-
lisher. Times Union, Albany, N.Y. With him is DeWitt Helm, presi-
dent. Association of National Advertisers of New York. Welcome,
gentlemen.
Before I begin the testimony, I want to have a statement of my
own entered into the record. I have an advertising public relations
background. I will let my bias be known immediately.
I believe firmly that advertising goes into a product iust as much
as the research and development to develop the product and the
raw materials to make the product. We recognize that in our legal
system, stressing the importance of our copyright laws.
If you look at all the trade negotiations, one of the centerpieces
of dispute is enforcement of the intellectual property rights because
they get abused. One of the reasons why American products are so
valuable is the amount of money and creativity that goes into the
advertising of that product.
With that prejudgment on my part, I will now turn to Mr. Gibian
from Estee Lauder Co. We are under I hope a 5-minute rule.
[Mr. Kopetski submitted the following:]
1163
SUGGESTED STATEMENT
MR. KOPETSKI
Mr. Chairman, I would like to voice my opposition to the proposal to limit the
deduction for advertising expenses - this proposal is tantamount to a tax on
advertising. Such a tax could seriously disrupt the economy, reduce competition
among businesses and products and discriminate against small businesses as well
as minority and small media outlets. It also would levy higher taxes on companies
solely because they have large advertising budgets, and reduce the pubUc's access to
news, information and entertainment.
The tax treatment of advertising costs is governed by the same general
principles applicable to all other business expenses. The recurring nature of an
expenditure in roughly the same amoimts each year suggests that the benefits of
the expenditure do not last beyond the year. This feature is characteristic of
virtually all advertising expenses. Moreover, no element of advertising costs is
viewed by Congress or Treasury as a tax expenditure.
Advertising is the most economically e£5cient means of marketing a product
to a mass society. Advertising allows producers to deliver goods and services more
efficiently and it permits consumers to significantly improve their standards of
living because it enhances their knowledge of and their access to better quahty,
lower priced products.
Any change in the tax law that makes advertising more expensive also is
likely to discourage some companies from introducing new products. If new
entrants cannot advertise as effectively and efficiently they will have a lower
probabiUty of success.
At a time when Treasury and the Congress are looking at ways to simphfy
the tax code, a law which defers a deduction for "advertising" expenses would add
complexity and be too imprecise to be workable. The Treasury would be forced to
attempt to draw lines which would rule one type of marketing expense "advertising"
and another not. Is a free copy of a newspaper an advertising or a production
expense? Is the salary of the marketing director to be divided by some formula
between advertising and non-advertising? Unworkable concepts create complexity,
high compliance costs, and disrespect for the tax system. When the tax law makes
distinctions that are not economically real, confusion follows.
1164
STATEMENT OF GERALD Z. GIBIAN, CORPORATE VICE PRESI-
DENT, TAX AND REAL ESTATE, ESTEE LAUDER CO.,
MELVDLE, N.Y., ON BEHALF OF COMMITTEE FOR COMPETI-
TION THROUGH ADVERTISING
Mr. GiBlAN. Thank you very much. I am Gerald Gibian, corporate
vice president, tax and real estate, of the Estee Lauder Cos. Estee
Lauder is a member of the Committee for Competition Through Ad-
vertising.
On behalf of the committee, I appreciate the opportunity to tes-
tify before you today in opposition to a proposal to capitalize adver-
tising costs and amortize them over a period of years.
The Committee for Competition Through Advertising is made up
of companies in various industries associated with advertising, in-
cluding the companies that must advertise their products in order
to compete in the domestic and international marketplaces, the
companies that assist them in communicating their message, and
the companies that provide the media for carrying that message.
Raising consumer awareness of our products and providing infor-
mation about the prices and features of our products are an inte-
gral part of our efforts to compete in the global marketplace and
to continue to make certain that U.S. companies remain pre-
eminent.
It is obviously not in the interest of businesses that must adver-
tise to establish and expand the markets for their products and
services to be subject to a tax penalty for costs related to selling
their products and services. Nor is it in the interest of these busi-
nesses that provide the media for advertising, including television
and radio stations, newspapers, magazines, publishers of yellow
pages and sports franchisers. It is also not in the interest of firms
that provide support services for advertising. However, what we
wish to focus on today are the numerous reasons that it is not in
the interest of the general public to impose this new tax burden.
The increased cost of advertising as a result of this proposal
would present a barrier to market expansion for producers of goods
and services. Companies that will be hardest hit by the increased
cost will be both startup ventures and established businesses that
must continually introduce new products. In both cases, more ad-
vertising is needed to make the products' existence and attributes
known to potential customers.
Creating barriers for new products entering the marketplace will
also result in less product innovation, causing the United States to
lose global competitiveness. In addition, U.S. producers of goods
and services will be at a competitive disadvantage vis-a-vis goods
and services produced by foreign-owned companies, because vir-
tually all of our trading partners permit a tax deduction for adver-
tising.
Finally, this proposal will have a particularly devastating effect
on small businesses which rely heavily on advertising for short-
term business growth.
In summary, the proposal to require the amortization of advertis-
ing expenses does not have a sound policy basis. It is bad tax pol-
icy. It is bad economic policy. It does not make business sense. To
make this clear, there are some points I would like to highlight:
1165
First is the mismatching of income and expense. Under current
law, advertising costs are subject to the same principles as other
business expenses for determining whether they should be de-
ducted in the year incurred. The Tax Code does not provide special
treatment of advertising. Recurring expenditures are generally
found to be currently deductible because the need to renew the
benefits through additional expenditures each year suggests a use-
ful life of less than a year.
The reasoning behind the argument for requiring amortization of
advertising is abstract. A conceptual argument is made that adver-
tising is like capital spending on equipment and structures. There
is little evidence to substantiate such a claim. If anything, eco-
nomic studies show that the value of most advertising is entirely
eliminated within 1 year.
However, I can tell you for more than 20 years in the consumer
products industry, which is heavily reliant on advertising, that a
large proportion of all advertising refers to offers of short duration.
For example, in the cosmetic industry much of our advertising is
seasonal, focused on holidays. Similarly, retail advertising is di-
rected at the sale of goods directly to consumers within a short pe-
riod of time. Also, weekly newspaper ads by a local supermarket
announcing the price of lettuce have little value next month, much
less next year.
Classified advertising is similar. In addition, promotion advertis-
ing is designed to provide an incentive for immediate sales, and in
point of fact most coupons have an expiring date of less than 1
year.
Direct marketing through mail or telephone sales is also de-
signed to generate immediate sales. Industries suffering from fi-
nancial problems advertise for quick sales.
Finally, advertising affects decay quickly. Even well-known
brands that stop advertising experience a rapid decline in sales.
Nevertheless, a proposal requiring amortization of advertising
expenses would not allow a complete writeoff of expenditures until
years after such expenditures rendered any value to the business.
This is pure mismeasurement of income, and a pure tax penalty.
In addition, complexity would be increased. There would be re-
duced competition. There would be a distortion of business prac-
tices, and revenue would not be significantly enhanced.
In conclusion, there is no policy justification for further limiting
the deductibility of advertising beyond the limitations set by
present law. Enactment of any proposal would create a barrier to
expansion of markets for goods and services, thereby impeding eco-
nomic growth at a point in time when economic growth is des-
perately needed.
In addition, such a proposal would reduce competition by restrict-
ing information flow and impeding the ability of new entrants to
challenge established firms. It would also add substantial complex-
ity to current tax rules.
Thank you for affording me the opportunity to testify.
Mr. KOPETSKI. Thank you very much, Mr. Gibian.
[The prepared statement follows:]
1166
STATEMENT
on
CAPITALIZATION OF ADVERTISING EXPENSES
scheduled for hearings on
September 8, 1993
before the
SUBCOMMITTEE ON SELECT REVENUE MEASURES
of the
HOUSE COMMITTEE ON WAYS AND MEANS
as part of their hearings on
MISCELLANEOUS REVENUE ISSUES
on behalf of the
Committee for Competition Through Advertising
by
Gerald Z. Gibian, Estee Lauder Companies
I am Gerald Z. Gibian, Corporate Vice President Tax and Real Estate, Estee Lauder Companies.
Estee Lauder is a member of the Committee for Competition through Advertising, which
represents a coalition of companies in various industries associated with advertising, including the
companies that must advertise their products in order to compete in the domestic and
international marketplaces, the companies that assist them in communicating their message, and
the companies that provide the media for carrying that message. Raising consumer awareness of
our products and providing information about the prices and features of our products are an
integral part of our efforts to compete in the global marketplace and continue to make certain that
U.S. companies remain pre-eminent
On behalf of the Committee for Competition through Advertising, which includes Estee Lauder
Companies; J. Walter Thompson; Ogilvy and Mather, the Omnicom Group, which includes the
BBDO, DDB Needham, and TWBA advertising networks; Hachette Filipacchi Magazines, Inc.,
the publishers of American Photo, Audio, Boating, Car and Driver, Cycle World, Flying,
''opular Photography, Road and Track, Showboats International, Stereo Review, Woman's Day,
Elle, Elle Decor, Home Magazine, Best Selling Home Plans, Metropolitan Home;and Euro
RSCG Holdings, Inc, Messner Vetere Berger McNamee Schmetterer, Tatham, Stranger &
Associates, Creamer Dickon Basford, Lally McFarland & Pantello, Robert A. Becker, I would
like to thank you for the opportunity to express our views on a proposal that would replace
immediate write-offs of advertising expenses with amortization of these expenses over a fixed
number of years.
It is obviously not in the interest of businesses that must advertise to establish and expand the
markets for their products and services to be subject to a tax penalty ~ which is what this
proposal amounts to - for costs related to selling their products and services. Nor is it in the
interests of those businesses which provide the media for advertising, including television stations,
radio stations, newspapers, magazines, publishers of "yellow pages," and sports franchises. It is
also not in the interest of firms that provide the support services for advertising firms. However,
what we wish to focus on today are the numerous reasons that it is not in the interest of the
general public to impose this new tax burden.
The increased cost of advertising as a result of this proposal would present a barrier to market
expansion for producers of goods and services, which could result in lower overall economic
growth. Companies that will be hardest hit by the increased cost will be both start-up ventures,
already strapped for cash, and established businesses that must continually introduce new
products. In both cases, more advertising is needed to make the products existence and attributes
known to potential customers. Creating barriers for new products entering the marketplace will
also result in less product innovation, causing the U.S. to lose global competitiveness. In
addition, U.S.-owned producers of goods and services will be at a competitive disadvantage vis-^-
vis goods and services produced by foreign-owned companies because virtually all of our trading
partners permit a deduction for advertising. Finally, this proposal will have a particularly
1167
devastating effect on small businesses, which rely heavily on advertising for short-term business
growth.
Increasing the cost of advertising would also affect publishers and broadcasters and the wide
public access to news and information, as well as commercial television and radio programming,
that they currently can provide to tiie public at litde or no charge because they are supported by
advertising. Increased costs of advertising will result in less advertising revenue for the media and
likely will be felt more in smaller communities. Publishers and broadcasters that are suffering
financially may not be able to withstand the drop in advertising revenue.
In summary, the proposal to require the amortization of advertising expenses does not have a
sound policy basis. It is bad tax policy. It is bad economic policy. It does not make business
sense. To make this clear, there are five additional points I would like to highlight:
1 . In general, the anticipated effect of advertising is to increase sales in the immediate future.
Thus, capitalizing a portion of advertising expenses would create a mismatching of income
and expense that penalizes companies that advertise to increase sales of their products.
2. Devising and implementing a definition of "advertising" for tax purposes would be
extremely difficult and would add a great deal of complexity to the tax law.
3. Increases in the after-tax cost of advertising reduce competition.
4. Requiring amortization of advertising expenses would result in the needless distortion of
business practices.
5. Behavioral responses to a requirement to capitalize advertising would eliminate a
significant portion of the anticipated revenue gain.
Mismatching Inwmc and Expense
Under current law, advertising costs are subject to the same principles as other business expenses
for determining whether they should be deducted in the year incurred, as so-called "period costs,"
or whether tiiey should be capitalized and amortized over a period of years. The tax code does
not provide special treatment of advertising. Reciuring expenditures are generally found to be
cuirentiy deductible because the need to renew the benefits through additional expenditures each
year suggests a useful life of less than a year. Colorado Springs National Bank v. U.S..505 F.2d
1 185, 1 192(1 0th Cir. 1974). The reason for currently deducting most normal recurring
advertising has been stated as follows:
"The reason advertising expenses are (currently expensed) is tiiat these expenses
are generally of a yearly recurring nature resulting from a regular activity of a
taxpayer which produces new business on a relatively consistent basis each year."
ManhaMn Cq, Qf Virginia. Ing., 50 T.C. at 86 (1968).
The reasoning behind the argument for requiring amortization of advertising is abstract: a
conceptual argument is made that advertising is like capital spending on equipment and structures.
However, although this is a theoretically intriguing argument, there is litde evidence to
substantiate such a claim. If anything, economic studies show that the value of most advertising is
entirely eliminated within one year. A recent study ' partially co-autiiored by two Nobel
Laureates in economics. Dr. Kenneth J. Arrow and Dr. George G. Stigler, concludes:
[A]lthough there are a number of economic studies that suggest that
advertising is long-lived, tiiey are generally so fraught witii errors that one caruiot
rely on their findings. When we correct for some statistical problems, we find that
' Kenneth J. Arrow, George G. Stigler, Elisabeth M. Landes, and Andrew M. Rosenfeld,
Economic Analvsis of Proposed Changes in Tax Treatment of Advertising Expenditures.
Lexicon, Inc., Chicago, April 1990.
1168
the estimated duration intervals are much shorter than originally thought
Moreover, there are a number of studies (particularly more recent ones) that
suggest that advertising depreciates so rapidly that virtually all of its effects are
gone within a year. In short, the economic evidence does not support the view
that advertising is long-lived. ^
For those that do not trust economists-even those with Nobel prizes-it is important to check
their claims against a little common sense. Obviously, a large proportion of all advertising refers
to offers of short duration. Retail advertising is directed at the sale of goods direcUy to
consumers within a short period of time. For example, weekly newspaper ads by a local
supermarket announcing the price of lettuce have littie value next month, much less next year.
Classified advertising is similar. In addition, promotion advertising (e.g. where cents-off, refunds,
premiums, or coupons are offered) is designed to provide an incentive for immediate sales and, in
point of fact, most coupons have an expiration date of less than one year. Direct marketing,
through mail or telephone sales, is also designed to generate immediate sales. Industries suffering
from financial problems advertise for quick sales. Seasonal products are advertised for short
periods during the year with the objective of selling as much as possible during that time. In
addition, a large portion of new product advertising clearly has little value after one year because
the products themselves often do not exist after one year. Furthermore, the Federal Trade
Commission regulates the length of time that certain advertisements can run. An advertiser
cannot describe a product as "new" for a period of time longer than six months. SfiS Advisory
Opinion Digest, No. 120, April 15, 1967; Advisory Opinion Digest, No. 146, October 24, 1967.
Finally, advertising's effects "decay" quickly - even well-known brands that stop advertising
experience a rapid decline in sales. Nevertheless, a proposal requiring amortization of advertising
expenses would not allow a complete write-off of expenditures until years after such expenditures
rendered any value to the business. This is pure mismeasurement of income, and a pure tax
penalty to businesses simply trying to promote their products.
Of course, we can all imagine instances when advertising does have a useful life in excess of one
year. However, there is no need to change the law to achieve the proper tax treatment in these
cases. Under present law, there are already established criteria for determining whether
advertising, like any other business expense, should be capitalized and amortized over a number of
years.3
CQmplgyitY
Any proposals that require amortization of expenses would add a new layer of mind-numbing
complexity to the tax law. A description of legislation to implement this proposal could be
deceptively simple, but the Treasury regulations interpreting this rule will be extremely
complicated and will be followed by years of controversies between taxpayers and the IRS over
which costs are non-deductible advertising expenses and which may be considered to be some
other deductible business expense.
The term "advertising" is just one component of general marketing expenses incurred by business.
Advertising, promotion, and marketing expense can take many forms. Product demonstrations,
trade shows, free samples, price discounts, phone solicitations, mail solicitations (including mail
order catalogs), on-site solicitation, public relations, and community service are all methods that
businesses use to promote themselves and their products. It is unclear which of these are
"advertising" under the proposal and which are not.
2ld. at 39-40.
3§£s, e.g., Welch v. Helvering. 290 U.S. 1 1 (1933) (payments to promote development of
business and to establish goodwill of prospective customers); Cleveland Electric Illuminating Co.
V. U.S.. 7 CI. Ct 220 (1985) (advertising expenditures intended to lessen public fears about a
nuclear power plant); Best Lock Corp. v. Comm'r.. 31 T.C. 1217, 1234-5 (1959) (expenditures to
produce trade catalogues); Rev. Proc. 89-16, 1989-1 C.B. 822 (package design costs); Rev. Rul.
68-283, 1968-2 C.B. 63 (advertising to promote products at state fair operated over two tax
•years).
1169
The end result would be tremendous uncertainty for taxpayers that are acting in good faith and
trying to comply with the law. It is important to remember that advertising expenditures are
undertaken by hundreds of thousands of corporations, partnerships, and sole proprietorships of all
sizes. Their uncertainty would not be reduced after the publication of dozens of pages of
regulations (probably three to five years after passage of the initial statute). Even scarier is the
specter of hundreds and perhaps thousands of accountants and attorneys who would be hired by
private business to defend us against the onslaught of controversy with IRS. On the government
side, a legion of IRS agents would have to be trained in the intricacies of this new law. Steep
compliance costs for business as well as large administrative costs for the Federal government
need to included in your consideration of any proposal to require amortization of advertising.
Although they do not appear in any official revenue estimate, these costs are very real.
Rgtfwccd Compctitign
As any economist will tell you-whether it is the stock market or the supermarket-it is
mformation that makes markets function efficienUy. Advertising provides essential information to
consumers and businesses and thereby promotes competition.^ When a business advertises price
and quality, it forces competitors to lower prices and increase quality.
Furthermore, the consiuner benefits from advertising are not only information about the specific
product of the company sponsoring the advertising but are often also general information about
that product which may be sold by a number of companies. This "spillover" benefit of advertising
is especially large for new products and more complex products. In such cases, there is concern
that there is too little advertising and the last thing that should be done is penalize such
advertising. For example, consider the introduction of a new type of low-fat shortening used in a
wide variety of food products. It certainly may be a benefit for society as a whole to be better
informed about a product that can improve public health, but it does not pay for any one firm to
do tiiis advertising. Therefore, less advertising is undertaken tiian is socially optimal.
Finally, advertising is the great equalizer. By means of advertising, new entrants with lower-cost
or higher-quality products can enter into a market and may take on existing dominant firms. By
breaking down "barriers to entry," advertising greatiy increases the competition within an industry
and the overall competitiveness of the economy. Increasing the cost of advertising will
disproportionately hurt start-up businesses and businesses with new products that are more
dependent on advertising. In addition, tiie increased cost will be particularly hannful to marginal
businesses that depend on advertising to create a quick boost in sales. Small business, in
particular, will be hurt by this proposal because they are very dependent on advertising for short-
term sales to create the cash to build their business.
Not only would the capitalization of advertising result in reduced competition in the marketplace,
but also it would put U.S. producers of goods and services at a competitive disadvantage vis-k-vis
foreign-owned companies selling goods in tiie United States. Virtually all of our trading partners
provide a deduction for advertising. Therefore, for U.S.-owned firms the cost of advertising their
products will be higher than it is for foreign-owned firms.
Pistgrtion of Pusiness Practices
If, as proposed, the current deductibility of advertising were limited, businesses likely would shift
their marketing activities from tiiose falling under the new tax definition of "advertising" to other
similar activities. For example, in response to this new tax penalty, a business might reduce
spending on "conventional" advertising and instead increase the size of its sales force or increase
its direct mail solicitation even though these methods may not be the most effective means of
promoting its product Thus, purely in response to a change in the tax law, resources would be
diverted from their most efficient uses.
4 See, for example, Benham, "The Effect of Advertising on the Price Of Eyeglass, " Journal of
l.awanHFxonomics. Vol.. 15 (1972), p.337.
1170
Those businesses that rely heavily on tax-disadvantaged advertising would be at a competitive
disadvantage. For example, a clothing retailer that relies on conventional print advertising would
be put at a competitive disadvantage with a clothing mail-order cataloger who relies entirely upon
mailing to market its product.
Similarly, those businesses that rely heavily on providing tax-disadvantaged advertising would be
at competitive disadvantage. For example, television stations and newspapers would suffer at the
expenses of firms that perform promotions and phone solicitation.
Revenue
This Subcommittee is currently considering a proposal to capitalize and amortize a portion of
advertising expenses in order to raise revenue. However, behavioral responses to the proposal
will eliminate a significant portion of the anticipated revenue gain as businesses seek other means
to market their goods and services. However, even if a relatively small amount of revenue were
collected, the overall burden on the users and providers of advertising would still be large.
Conclusion
ThCTe is no policy justification for further limiting the deductibility of advertising beyond the
limitations set by present law. Enactment of any such proposal would create a barrier to
expansion of markets for goods and services, thereby impeding economic growth at a point in
time when economic growth is desperately needed. In addition, such a proposal would reduce
competition by restricting information flow and impeding the ability of new entrants to challenge
established firms. It would also add substantial complexity to current tax rules.
1171
Mr. KoPETSKi. Our next witness is Mark McConaghy, former
Chief of Staff of the Joint Committee on Taxation, presently the
Managing Partner of the Washington National Tax Services, Price
Waterhouse Corp. here in Washington, D.C. Welcome back to this
committee.
STATEMENT OF MARK MCCONAGHY, MANAGING PARTNER,
WASHINGTON NATIONAL TAX SERVICES, PRICE
WATERHOUSE, WASHINGTON, D.C, ON BEHALF OF AD HOC
GROUP TO PRESERVE DEDUCTION FOR ADVERTISING
Mr. McCoNAGHY. Thank you, Mr. Chairman. I appreciate the op-
portunity to appear before the subcommittee today to discuss the
tax policy issues relating to advertising expenses. I am testifying
today on behalf of a coalition of companies with a common goal of
retaining the current tax treatment of advertising expenses.
As you know, before the subcommittee is a proposal to limit the
current business deduction for advertising expenses as a part of a
number of revenue-raising proposals. Such proposals are not new.
They have been considered in the past by the Ways and Means
Committee and the Senate Finance Committee. For a number of
good reasons. Congress has declined to make changes in this area
of the tax law.
I would like to focus today on several issues relating to the tax
treatment of advertising expenses that demonstrate why Congress
should continue to permit the current deduction. These issues are
the status of the law and policy issues relating to the treatment of
current versus capital expenditures, the financial statement treat-
ment of advertising expenses, and, finally, the administrative com-
plexity that would be added to the tax law if such proposals were
enacted.
Advertising is an ordinary necessary business expense permitted
as a deduction imder section 162 of the Internal Revenue Code.
The allowance of that deduction reflects the net income concept
underlying the U.S. income tax system. Under a net income con-
cept, all expenditures that are not contrary to public policy should
be recognized either as a current deduction or a future deduction
through depreciation or amortization. To determine when the ex-
penditure is recognized, one must satisfy two concerns; that the ex-
penditure be recognized at approximately the same time as the rev-
enue to which it relates is recognized and that the items only be
recognized when they can be measured with reasonable certainty.
Generally an expenditure should be allowed as a deduction unless
it creates some measurable future benefit.
The fact is that most advertising expenses are associated with
current income. For example, advertising is used to notify consum-
ers of current prices, provide information about new models, pro-
vide industrial customers with product specifications, and direct
consumers to retailers who stock the product. To limit the current
deduction of the cost of a real estate listing or a supermarket ad-
vertisement in today's newspaper on the grounds that some portion
of the advertising may be related to a future year's income is just
not fair.
To go down the road suggested by the proposal before the sub-
committee today would suggest that a portion of all of our salaries
1172
should be capitalized to reflect the fact that every working experi-
ence we encounter in our jobs will train us for future workplace ex-
periences. Similarly, such an argument might require capitalization
for expenditures relating to the preparation of a corporation's fi-
nancial statement, a portion of a marketing director's salary or the
costs associated with a corporate strategic planning department
since these expenditures may produce some future benefit to the
corporation.
To single out advertising costs from other period costs that are
currently deductible does not represent sound tax policy. Moreover,
any lines that are drawn between advertising costs and other cor-
porate expenditures will give an advantage to certain approaches
to marketing as compared to others. It is for these reasons that the
financial accounting principles have required that advertising be
deducted currently and have allowed the capitalization of advertis-
ing expenses only in very limited circumstances.
This position has recently been reviewed and affirmed by the fi-
nancial accountants in the AICPA and accepted and cleared for
final issuance by the Financial Standards Accounting Board.
The AICPA concluded that capitalizing advertising expenses gen-
erally should not be permitted due to tne difficulty in identifying
and isolating future benefits that arise from those expenditures.
While the tax and financial statement treatment of an expense do
not necessarily have to be the same, in the case of advertising a
common issue drives both tax and accounting treatment. It is sim-
plv too difficult to identify and measure the asset that is produced
when expenditures are made on advertising.
Current tax law already addresses instances where the future
benefit of advertising expenses extend significantly beyond the pe-
riod in which the expenditures are incurred. In such cases, adver-
tising expenses are capitalized.
Finally, distinguishing those advertising expenses for which a de-
duction would not currently be allowed would create administrative
nightmares for both the IRS and taxpayers. Even if Congress were
to limit the current deductibility to an arbitrary percentage, the
IRS and taxpayers would still be thrown into endless controversies
over resolving which marketing and other expenditures would con-
tinue to be deducted currently.
What would be the treatment, for example, of product inventory
discounts, or giveaway promotions that are utilized to launch a
product? What about the sponsorship of public events, the prepara-
tion of point of sale materials such as brochures, or something as
simple and basic as printing business cards? The list goes on and
on and the definitional issues would be tremendous.
Any limitation on the deductibility of advertising expenses would
require that rules and tests be established for all these activities
and expenditures which are generally deductible under present
law. It would be extremely difficult for the IRS to write and admin-
ister any rules that distinguish between these costs.
In summary, I would like to thank the subcommittee for permit-
ting me the opportunity to testify on this issue today. Furthermore,
I would like to urge the subcommittee to continue to heed the prin-
ciples of tax reform and simplification as it considers revenue-rais-
ing proposals. Proposals requiring a portion of advertising costs to
1173
be capitalized run counter to those principles by needlessly com-
plicating the tax law and wasting precious Government and tax-
payer resources on litigation and record keeping.
Mr. Chairman, I would like permission to submit a written state-
ment for the hearing record and would be pleased to answer ques-
tions.
Mr. Payne [presiding]. Without objection, so ordered, and thank
you for your testimony.
[The prepared statement follows:]
1174
STATEMENT OF MARK McCONAGHY
AD HOC GROUP TO PRESERVE THE DEDUCTION FOR ADVERTISING
I. SUMMARY
My name is Mark McConaghy and I am the managing partner of Price Waterhouse's
Washington National Tax Services office. I appreciate the opportunity to appear before the
subcommittee today to discuss the tax and financial accounting issues relating to advertising
I am testifying today on behalf of a coalition of companies and trade associations with the
common goal of retaining the current tax treatment of advertising expenses. A list of the
members of the coalition is included at the end of this testimony.
As you know, before the subcommittee is a proposal to limit the current business deduction
for advertising expenses as one of a number of miscellaneous revenue-raising proposals.
Such proposals are not new; they have been considered in the past by both the House Ways
and Means Committee and the Senate Finance Committee.
For a number of sound reasons, Congress has declined to make changes in this area of the
tax law. I would like to focus today on several issues relating to the tax treatment of
advertising expoises that demonstrate why Congress should continue to permit the current
deduction. These are as follows:
• The policy issues relating to the treatment of current versus cs^ital expenditures.
• The &iancial accounting treatment of advertising expoises.
• The administrative complexity that would be added to the tax law if such proposals
were enacted.
n. BACKGROUND AND TAX POUCY ISSUES
Matching and Measurability
Advertising is an ordinary and necessary business expense permitted as a deduction under
Internal Revenue Code Section 162(a). The allowance of the deduction reflects the net
income concq)t underlying the U.S. income tax system.
Under a net income concq>t, all ordinary and necessary business expenditures (not contrary
to public policy) should be recognized either as a current deduction or as a future deduction,
through depreciation or amortization. To determine when the expenditure is recognized, one
must satisfy two tax policy concerns that permeate our income tax system - the need to
match deductions and income, and the practical requirement that items of income and
expense be recognized when they can be accurately measured.
The matching of income and expenditures results in a more accurate calculation of net
income. Thus, expenditures generally are required to be c^italized - and amortized and
deducted over a period - if they produce significant income over a period that is longer than
one year. The accurate calculation of net income also requires that items be recognized
when they can accurately be measured. Requiring an expenditure to be capitalized where the
future benefit to be derived from the expenditure is merely speculative does not accurately
measure income. Generally, an expenditure is and should be allowed as a current deduction
unless it creates a measurable future benefit.
The fact is that advertising expenses are associated with current income. For example,
advertisements are used to notify consumers of current prices, provide information about new
models, provide industrial customers with product specification, and direct consumers to
retailers who stock the product. To limit the current deduction of the cost of a real estate
listing or a supermarket's advertisement in today's newspiq>er on grounds that some portion
of the advertising may be related to a future year's income is clearly unfoir. It is extremely
1175
difficult to identify the benefits of advertising that stretch beyond a relatively short period of
time. If it is possible that some future benefit may be derived from advertising, that future
benefit is neither demonstrable nor suscq)tible to measurement.
It is also important to recognize that advertising expenses generally represait a risky
investment. No one knows whether a new ad campaign will be successful or how long the
effects of advertising will last.
Large corporations that undertake so-called goodwill or institutional advertising to, among
other things, improve consumer recognition of the company and its products generally do so
on a regular basis. There is little or no expectation that the benefits of this advertising will
last for a significant period of time. It is extremely unlikely that a corporation could
measure whether institutional advertising produced any increase in sales over the long run.
There is no method that exists for identifying and measuring those lasting benefits, if such
benefits do in fact exist.
In many respects, advertising expenditures that are longer lasting are similar to outlays for
research and developm«it. They may produce income in future years, but the amount and
duration of those returns are very uncertain. Congress has continued to reaffirm the current
deductibility of research and developmental expenditures. Congress has done so not only as
an incentive but also in recognition of the fact that requiring the capitalization of such
expenditures would create difficult administrative problems and would not necessarily
produce a better measure of net income.
The proposal before the committee to limit the current deduction for a portion of advertising
expenditures supposes the use of an arbitrary capitalization rule that is not designed to
accurately measure net income. For example, if it were assumed that virtually all
companies' advertising provides no future benefit, any average capitalization rate would
mismeasure the net income of those companies. The average capitalization rate would also
not be correct for the very small percentage of companies whose advertising was presumed to
provide a future benefit. Thus, such an approach can never adequately or accurately match
income and deductions. It would be inaccurate for virtually all taxpayers.
Copparison with othgr pgriod costs
Treating a portion of advertising costs as a capitalizable item would set a very disturbing
precedent. It would suggest that a portion of any ordinary and necessary business
expenditure could be capitalized if it includes a component that produces a speculative future
benefit.
In performing our jobs, each of us learns how to perform the job better. Every working
experience we encounter in our jobs trains us to handle future work place experiences. Yet
few would suggest that an arbitrary portion of each of our wages should be capitalized in
order to reflect that potential future benefit to our employers.
Similarly, it could be argued that expenditures relating to the preparation of a corporation's
financial statement or the costs associated with a corporate strategic planning department will
produce some future benefit to the corporation, and thus should be c^italized. There is also
a future benefit in making expaiditures to ensure that a company is complying with federal
and state regulations. Yet, in none of these cases is capitalization appropriate or desirable
because the future benefit is speculative and uncertain.
To single out advertising costs from other period costs that are currently deductible simply
does not represent sound tax policy. Moreover, any lines that are drawn between
advertising costs and other corporate expenses will give an advantage to certain ^proaches
to marketing as compared to others. For example, retailers that must advertise on a regu'ir,
weekly basis in order to bring consumers into their stores would be disadvantaged by the
proposal.
1176
Current Tax Law Adequately Addresses Future Benefits
Current tax law already addresses instances where the future benefit of advertising
expenditures extends significantly beyond the period in which the expenditures are incurred.
In such cases, advertising expenditures are capitalized.
For example, where advertising expenditures are incurred in connection with placing
depreciable property in service, the advertising costs must be capitalized into the cost of the
property. Thus, in Cleveland Electric Dluminating Co. v. U.S.. 7 CI. Ct. 220 (1985),
advertising expenditures made by a utility to ease the public's fear of nuclear power related
to the construction of a nuclear power plant were required to be recovered as the plant was
depreciated.
Advertising expenditures that result in identifiable tangible assets with useful lives, such as
the purchase of a blimp, are currently required to be capitalized for Federal income tax
purposes. Expenditures that result in identifiable intangible assets that will be used
repeatedly in future advertising campaigns must also be capitalized.
There are other examples where the law clearly provides for the capitalization of large, one-
time expenditures associated with the creation of a tangible or intangible asset with a life that
extends beyond one year. In each of these situations an asset that could be exploited for
future benefit had clearly been brought into existence. On the other hand, the more common
types of advertising do not generate such an asset. In the absence of the generation of an
asset that will demonstrably contribute to a future income stream, a current deduction is
appropriate.
in. FINANCIAL ACCOUNTING ISSUES
The inability to establish and measure the future economic benefit of advertising is the
primary reason that financial accounting principles have required almost all advertising to be
expensed currently, and has allowed capitalization in only very limited circumstances.
The American Institute of Certified Public Accountants recently J^jproved a Statement of
Position (SOP) entitled, "Reporting on Advertising Costs" that was prepared by its
Accounting Standards Executive Committee (AcSEC). The SOP was approved and cleared
for final issuance by the Financial Accounting Standards Board (FASB) on June 10, 1993.
Accordingly, the SOP may be considered an explanation of the application of generally
accepted accounting principles.
The SOP requires that the costs of advertising be expensed on a company's financial
statements either as incurred or as of the first time the advertising takes place, unless the
advertising is direct-response advertising that results in probable future economic benefits or
results in the acquisition or creation of a tangible asset with use beyond the current
advertising campaign (such as the above-noted blimp).
In preparing the SOP, the AcSEC rejected the notion that advertising costs that are not
related to tangible assets ~ other than direct-response advertising expenditures - be
c^italized because "future benefits beyond the first time the advertising takes place are too
uncertain and are not demonstrable or measurable with the degree of precision required to
recognize an asset."
The AcSEC concluded that the ability to identify and isolate future benefits has improved
because of greater sophistication of data-gathering and analysis, based on econometiic models
and scanner studies. However, the AcSEC maintained that most advertising should be
expensed and that capitalization of most advertising should be prohibited because the benefits
are not measurable "with the degree of precision required to report an item in the financial
statements."
1177
The financial accounting and tax treatment of particular business expenditures do not
necessarily have to be the same. In fact, the financial accounting treatment of advertising
costs should be only one factor taken into account in determining the tax accounting
treatment of such costs. However, the theory behind capitalization for both financial and tax
accounting principles is the same -- that the period in which expenses are deducted should
match the period in which the income generating those expenses was earned. In general, for
both tax and financial accounting purposes, advertising costs match income earned in the
current year.
Direct Response Advertising
The AcSEC determined that the only exception to the concept that advertising be expensed
for financial accounting purposes should be in the case of direct-response advertising.
Direct-response advertising is advertising that is expected to result in a decision to buy an
entity's products or sovices by customers who can be shown to have responded specifically
to the advertising. In order to sustain such a showing, documentation demonstrating the
customer has responded to a specific advertisement is required. Where capitalization of
direct-response advertising is allowed by the SOP, it is expected that the period over which
the benefits of direct-response advertising are amortized would usually be short.
IV. ISSUES OF ADMINISTERABILITY AND COMPLEXITY
Distinguishing those advertising expenditures for which a deduction would not be currently
allowed would create administrative nightmares for both the IRS and taxpayers. Even if
Congress were to limit the current deductibility to an arbitrary percentage, the IRS and
taxpayers would still be thrown into endless controversies over resolving which marketing
and other expenditures would continue to be deductible currently.
Direct payments to the media for placing advertisements may more easily fall within a
simplified definition of advertising. However, the line between direct advertising
expenditures and other product marketing costs is very difficult to draw. What would be the
treatment, for example of product introductory discounts, or even giveaway promotions that
are utilized to launch a product? What about the sponsorship of public events, the
preparation of point-of-sale materials, such as brochures, or something as simple and basic as
printing business cards? The list goes on and on.
Such a proposal would require additional recordkeeping to c^ture costs for a category of
business expense arbitrarily carved out from other ordinary and necessary business costs.
Taxpayers probably would be required to maintain records of their advertising and other
marketing expenses for lengthy periods. Moreover, the discrq)ancy between financial and
tax accounting that would be created under the proposal would require taxpayers to create
new reconciliations of these differences to be accounted for on Form 1 120. While
businesses identify "advertising costs" on their tax returns now, most businesses do not
undertake the recordkeqring necessary to distinguish advertising from promotional costs, or
to allocate payroll to reflect time an employee may spend in reviewing an advertising
campaign, for example.
Any limitation on the deductibility of advertising expenditures would require that rules and
tests be established for all these activities, the expenditures for which generally are deductible
under current law. It would be extremely difficult for the IRS to write and administer any
rules that distinguish between these costs.
V. REVENUE CONSIDERATIONS
A principal reason for proposals to limit the current deduction for advertising have
traditionally been the revenue that such proposals would generate. It is not sound tax policy
to adopt rules that result in the mismeasurement of net income solely to raise revenue.
1178
It should also be noted that a proposal to require capitalization and amortization of some or
all advertising expenditures is a timing issue, not an issue of reducing total deductions
permitted to the taxpayer. Deferral of advertising deductions could increase revenue initially
through a substantial one-time effect, but would otherwise raise only modest additional
revenue in later years. Thus, any five-year revenue estimate would greatly overstate the
long-run revenue effect of such proposals.
VI. CONCLUSION
Congress in general, and this subcommittee in particular, should reject any proposal to
capitalize a portion of advertising expenses. Such a proposal would result in less accurate
measurement of net income, would deviate firom well-established principles of financial
accounting, and would create new and unnecessary compliance burdens for taxpayers as well
as increase the administrative burden on the IRS. While such a proposal would raise some
"one-time" revenue, it would do so at the cost of permanent inaccuracies in the measurement
of net income and permanent inefficiencies in the administration of the tax system.
Ad Hoc Group to Preserve the Deduction for Advertising
Borden, Inc.
Campbell Soup Company
E.I. Du Pont De Nemours and Company
Eastman Kodak Company
General Mills, Inc.
General Motors Corporation
Goodyear Tire & Rubber Company
Hallmark Cards, Inc.
Hasbro, Inc.
Hewlett-Packard Company
Kellogg Company
Merck & Co., Inc.
NATIONAL ASSOCL^TION OF REALTORS*
NKE, Inc.
NYNEX Corporation
Owens-Coming
PepsiCo, Inc.
Pillsbury
Sara Lee Corporation
1179
Mr, Payne. Our last witness of this panel represents the Adver-
tising Tax Coalition, Timothy White, who is a publisher of Times
Union, Albany, N.Y.; and my good friend DeWitt Helm, the presi-
dent of the Association of National Advertisers, New York, N.Y.
DeWitt and I were business colleagues in Virginia. We never
thought at that time we would be seeing each other in this setting.
Welcome to the Ways and Means Committee.
STATEMENT OF TIMOTHY WHITE, PUBLISHER, TIMES UNION,
ALBANY, N.Y^ ON BEHALF OF THE ADVERTISING TAX COALI-
TION AND THE NEWSPAPER ASSOCIATION OF AMERICA
Mr, White. Thank you for the introduction. In addition to being
publisher of the Times Union, a daily newspaper with a circulation
of 103,000 dailv and a Sunday edition of 160,000, additionally I ap-
pear on behalf of the Newspaper Association of America and the
Advertising Tax Coalition.
The Newspaper Association of America represents approximately
1,250 newspapers in the United States and Canada. The majority
are newspapers that account for more than 80 percent of the total
dailv circulation in the United States.
The Advertising Tax Coalition consists of 10 national trade asso-
ciations of which the newspaper association is one member.
As our country struggles to emerge from this recession, the last
thing we need or anyone needs is a reason not to advertise. Public
policy should be encouraging manufacturers, retailers and service
providers to reach out to new customers through advertising in an
effort to break this recession and to get the economy growing again.
A tax on advertising would have the opposite effect.
The present law treatment of advertising costs represents sound
tax policy. It reflects the reality that the cost of advertising is just
as essential to the operation of a business as the salaries of its em-
ployees, the rent for its space or the gasoline for the cars used by
the sales staff.
It is impossible to distinguish between advertising and all other
marketing expenses or promotion and sales expenses. Limiting ad-
vertising expense deductibility would mean that sales staff meet-
ings to discuss new sales techniques would be fully deductible, but
not meetings to review the latest ad campaign.
Another reason to currently deduct the cost of advertising is that
it is an expense that must be repeated or even increased from year
to year, reflecting the fact that advertising does not stay around to
create ongoing sales. Buying advertising does not buy an asset for
a company. The overwhelming volume of newspaper advertising is
designed to alert the reader to the availability of a certain product
or service at a certain price under certain conditions and most
often at a specific time and location.
Take a look at this copy of last Sunday's edition of the Times
Union. We have some advertising on the back page of the A section
by Olender Furniture and Sleep Shop, a local enterprise promoting
a 12-hour Labor Day sale. Just inside we have a Filene's Labor
Day clearance sale, and on page 2 an optician promoting free eye
exams to returning students.
Where is the residual asset value for the retailers whose lifeblood
is promoting tomorrow's special offer on a gallon of milk, a Mercury
1180
Marquis or back to school overalls? Most consumer businesses, es-
pecially retailers, have two things in common. First, they already
operate on razor thin profit margins and, second, advertising ex-
pense represents a significant portion of their total operating costs.
Reduce the deductibility of those advertising expenses and you
unfairly pressure an already stressed sector of our private econ-
omy. Two Nobel laureates in economics, the late George Stigler and
Dr. Kenneth Arrow, wrote a paper for the Advertising Tax Coali-
tion stating that "Advertising is a powerful tool of competition. It
provides valuable information about products and services in an ef-
ficient and cost-effective manner. In this way advertising helps the
economy to function smoothly, it keeps prices low and facilitates
the entry of new products and new firms into the marketplace."
The ads in this edition of the Times Union offer our readers a
potpourri of choices between vegetables and cuts of meat at com-
peting grocery stores, new automobiles at various Albany dealer-
ships, or new jobs with employers competing for a variety of em-
ployee skills. Without advertising, consumers would have to search
on their own for information about the existence and identity of
sellers and the prices they charge.
Certainly no one has to explain to a newspaper publisher how
dramatically advertising fosters competition. During the past 30
years our country has witnessed a virtual explosion of alternative
information sources in every community in the United States. In
the 14-county Albany area alone, for instance, there are 11 other
dailv newspapers, four local network affiliated TV stations, 20 net-
work affiliated radio stations, 16 independent radio stations, a
cable advertising network with three franchises reaching 142,000
homes, 6 outdoor billboard advertising companies, and more than
48 weekly community newspapers and shoppers. These 100+ media
companies together with direct mail and yellow pages advertising
compete for the annual $330 million spent in this relatively small
marketplace alone.
Since more than 80 percent of the ad dollars spent in this mar-
ketplace are spent with competitors of the Times Union, I am re-
minded daily of the role advertising plays in stimulating diversity
and competition in American media.
In conclusion, I cannot conceive of a tax proposal that more vio-
lates our American concept of fair play or a level playing field than
does the proposal to limit the current deduction for advertising ex-
penses, nor can I think of a tax proposal that is more counter-
productive at a time when we are attempting to stimulate our na-
tional and local economies.
Mr. Chairman, this subcommittee has a challenging task to meet
the revenue needs of this country, and I appreciate the difficulty
of your job. Nevertheless, we believe that the proposal to limit the
deductions for advertising costs would be unfair and anticompeti-
tive and would only contribute to slow growth or no growth in our
economy. We strongly urge you to reject this proposal. Thank you.
[The prepared statement follows:]
1181
Statement By Tim White
On BEHALF Of
THE NEWSPAPER ASSOCIATION OF AMERICA
AND
THE ADVERTISING TAX COALITION
BEFORE THE
SuBCOMMirrEE ON Select Revenue Measures
COMMITTEE on WAYS AND MEANS
u.s. house of representatives
Washington, D. C.
September 8, 1993
Mr. Chairman, and Members of the Subcommittee, my nsime is Tim White,
and I am publisher of the Times Union of Albany, New York, a daily newspaper
with a circulation of 106,000, and a Sunday edition circulation of 160,000. I am
appearing today on behalf of the Newspaper Association of America (NAA) and the
Advertising Tax Coalition, of which NAA is a member.
The Newspaper Association of America is a non-profit trade association
representing approximately 1,250 newspapers. NAA members account for more
than 80 percent of U.S. daily and Sunday newspaper circulation. Many non-daily
newspapers also are members of NAA.
The Advertising Tax Coalition consists often national trade associations,
including NAA. The other members of the Advertising Tax Coalition include:
American Advertising Federation, the American Association of Advertising
Agencies, the Association of National Advertisers, the Direct Marketing Associatio
the Grocery Manufacturers of America, the Magazine Publishers of America, the
National Association of Broadcasters, the National Newspaper Association, and thi
Yellow Pages Publisher's Association.
As our country struggles to emerge from this recession, the last thing we
need, or anyone needs, is a reason not to advertise. Public policy should be
encoxu-aging manufacturers, retailers, and service providers to reach out to new
customers through advertising, in an effort to break this recession, and to get the
economy growing again. A tax on advertising would have the opposite effect:
First, the present law treatment of advertising costs represents soxmd tax
pohcy. It reflects the reality that the cost of advertising is indistinguishable from
£my other marketing cost, whether for direct promotion, point of sales promotion,
discoimt promotions, or the salaries of sales personnel. The cost of advertising is
just as essential to the operation of a business as the salaries of its employees, the
rent for its space, or the gasoline for the sales staffs cars.
Second, it is impossible to distinguish between advertising and all other
marketing expenses, or promotion and sales expenses. Sales staff meetings to
discuss new sales techniques would be fully deductible, but not meetings to review
the latest ad campaign.
Third, another reason to ciurently deduct the cost of advertising is that it
represents a period cost — the amount spent on it must be repeated or increased
from year to year, which reflects the fact that advertising does not stay aroxmd to
create ongoing sales. Buying advertising does not buy an asset for a company. Th<
overwhelming volume of newspaper advertising is designed to alert the reader to
the availability of a certain product or service, at a certain price, vmder certain
conditions, and often at a specific location. It would not take a Times Union reade
long to reach that conclusion without the benefit of economic research. Just take a
look at this copy of last Sunday's edition of the Times Union -- we have advertising
for Olender Furniture and Sleep Shop ("91 Years of Good Family Business"),
promoting a 12-hour Labor Day Sale. We have Filene's Labor Day Clearamce Sale,
and on Page A2 we have an ad for a local optician offering returning students free
eye exams.
77-130 0 -94 -6
1182
Where is the residual asset value for the thoussuids (no, millions) of retailers
whose life-blood is promoting tomorrow's special offer on a gallon of milk, a Mercur
Marquis, or back-to-school overalls? Most consumer businesses - and especially
retailers -- have two things in common: (1) They already operate on razor- thin
profit margins, and (2) Advertising expense represents a significant portion of thei
total operating costs. Reduce the deductibihty of those advertising expenses and
you unfairly pressure an already-stressed sector of our private economy.
Two Nobel Laureates in economics, the late Dr. George Stigler auid Dr.
Kenneth Arrow, wrote a paper for the Advertising Tax Coalition which states that
"advertising is a powerful tool of competition ... It provides valuable information
about products and services in an e£5cient and cost effective mainner. In this way,
advertising helps the economy to function smoothly - it keeps prices low, and
facilitates the entry of new products emd new firms into the market." The ads in
this edition of the Times Union offer our readers a potpourri of choices between
vegetables and cuts of meat at competing grocery stores, new automobiles at varioi
Albany dealerships, or new jobs with employers competing for a vsuiety of employe
skills. Without advertising, consumers woidd have to search on their own for
information about the existence and identity of sellers, and the prices they charge.
As any daily newspaper, magazine, broadcast station, or other advertising-
supported form of media will demonstrate, advertising makes it possible for reader
and viewers to have access to a range of information and entertainment at little or
no cost, which makes the marketing and entertainment segments of our economy
the model for the world.
No one has to explain to a newspaper publisher how dramatically advertisin
fosters competition. During the past 30 years our country has witnessed an
explosion of alternative information sources in every community in the United
States. Recently, my local phone company suggested that the Times Union was a
non-competitive monopoly in the Albany market.
Let me describe how absurd it feels to be described by my NYNEX colleague
as monopoUstic. Markets are defined today by the television industry - they are
called Areas of Dominant Influence (ADI's). In the 14-County Albany ADI there ai
11 other daily newspapers, four local network-affiliated TV stations, 20 network-
affiliated radio stations, 16 independent radio stations, a cable advertising networl
representing three franchises and 142,000 homes, six outdoor billboard advertising
companies, and more than 48 weekly community newspapers and shoppers.
These lOO-plus media compemies, together with direct mail and Yellow Page
advertising, compete for the annual $330 miUion spent in this marketplace. Over
80 percent of the ad dollars spent in this marketplace are spent with competitors o
the Times Union. In fact, three out of five newspaper readers read something othe
than the Times Union each weekday, and one-third of those who do read our paper
also read something other than the Times Union on an average weekday.
Advertising also is indispensable to a fi-ee and independent press. In a
statement last yeaur on the floor of the House of Representatives, Ilep. Michael A.
Andrews described advertising as ". . . the economic engine that provides the
resources necess£iry for the media to supply the information the pubUc needs and
wants. Without advertising, media would become a State-run enterprise with all
the constraints and burdens that entails."
Washington Post columnist Richard Harwood wrote earUer this year that
"advertisers and the media need each other." Companies "advertise out of necessit
the necessity to move goods in a competitive international economy in which even
the biggest players . . . are insecure and struggling to survive," Harwood observed.
He went on to comment that advertising ensured, in the last century, the economic
independence of the American press from the control of government and political
parties.
Advertising provides approximately 80 percent of the gross revenues of
newspapers, with the remsdnder derived fi-om subscription income. Most of the
advertising revenue comes fi-om retail and service industries, which are
predominantly local businesses. Thus, it is the advertising that maikes it possible
1183
for newspapers, radio, television and magazines to present a diverse offering of
news, sports, weather, business, lifestyle, and entertainment information at a
nominal cost to the consimier. It is axiomatic that if advertising is taxed, and
therefore more expensive, advertisers will buy less of it and there will be less
information and entertainment in the media.
Mr. Chairman, in conclusion, I cannot conceive of a tax proposal that more
violates our American concept of fair play or a level playing field than does the
proposal to limit the current deduction for advertising expenses. Nor can I think o
a tax proposal that is more counterproductive at a time when we are attempting to
stimulate our national and local economies. A limit on the deduction for advertisir
costs would depress economic activity at a time when it is important to achieve
productivity and efficiency in our economy. The effect would be to increase prices
and reduce competition. At a time when Americans are benefiting more and more
from broader sources of information and entertainment, at Uttle or no cost because
of its advertising support, it would tend to shrink the number of these multiple
media outlets. And, at a time (in 1991) when daily newspapers have experienced
the worst advertising revenues since World War II, it would impose a further
penalty cost on our advertising-dependent industry.
Mr. Chairman, this Committee has a challenging task to meet the revenue
needs of this country, and we appreciate the difficulty of your job. Nevertheless, w
believe that the proposal to limit the deduction for advertising costs would be
unfair, and sinti-competitive, and would only contribute to slow growth, or no
growth in our economy.
We, therefore, strongly urge you to reject this proposal.
1184
Mr. Payne. Thank you, Mr. White.
Mr. Helm.
STATEMENT OF DEWITT F. HELM, JR., PRESmENT, ASSOCIA-
TION OF NATIONAL ADVERTISERS, INC., AND ALSO ON
BEHALF OF THE ADVERTISING TAX COALITION
Mr. Helm. Thank you, Mr. Chairman, for those warm words of
welcome.
For the benefit of the full subcommittee, my name is DeWitt
Helm, and before becoming president of the Association of National
Advertisers, 10 years ago, I was an advertising and marketing pro-
fessional for 25 years with three well-known consumer product
companies. I appear today on behalf of ANA and the Advertising
Tax Coalition in strong opposition to the proposal that would im-
pose a tax on advertising.
ANA represents virtually every manufacturing and service seg-
ment of industry. Our members account for approximately 80 per-
cent of national and regional advertising expenditures, and the
ATC represents 10 national trade associations whose members play
a dominant role in advertising.
All of the members of our coalition strongly urge Congress to re-
tain the full and current deductibility of advertising expenses. A
tax on advertising^ would severely weaken a powerful economic en-
gine that creates jobs, produces sales, and generates profits.
The proposal under consideration is bad public policy and bad
tax policy. It would damage the business community, throttle the
media, and stifle the efforts to invigorate our economy. Any limita-
tion on the deductibility of advertising would make advertising
more expensive and, like the Red Queen in Alice In Wonderland,
companies would have to run faster by spending more on advertis-
ing each year merely to remain in the same place.
A decrease in advertising will translate into reduced sales and
resonate throughout the economy. This tax would not only damage
the country's largest advertisers but also hundreds of thousands of
small businesses that advertise; every drug store, grocery store,
general store, and hardware store in this country would feel the
impact directly.
Proponents of limiting the advertising tax deduction argue that
since some advertising may provide benefits for longer than 1 year,
all advertising costs should not be taken fully in the year incurred,
but most advertising is directed to the sale of a particular product
or service in a veiy limited time frame. Advertising for super-
market specials, holiday and seasonal promotions, and classified
advertising for houses and job openings fill the spaces of our na-
tional and local media.
In 1989 the ATC asked the late Dr. George Stigler of the Univer-
sity of Chicago and Dr. Kenneth Arrow of Stanford University, both
winners of the Nobel Prize in economics, to carefully examine pro-
posals to change the tax treatment of advertising, and after com-
prehensive analysis they concluded, "We do not believe that exist-
ing economic evidence supports proposed changes in the tax treat-
ment of advertising."
Now, changing the tax treatment of advertising would also create
an enormous administrative burden for both Government and busi-
1185
ness. Advertising simply is not a term of art. It does not have any
fixed meaning. Will direct mail or signs in retail stores be consia-
ered advertismg? Should brand or company logos on trucks or T-
shirts be defined as advertising?
Developing working definitions will be complex, time consuming,
and impose high compliance costs. There is simply no business, tax
or public policy purpose served by singling out and discriminating
against advertising through the Tax Code. At best, our Nation's
economy is in a veiy sensitive phase, and it would take very little
to throw it into a tailspin.
The incentive for American business simply should and must be
to produce more profits, profits that will put people back to work.
Let advertising do its job by driving the economic engine that cre-
ates sales, profit, and employment.
In conclusion, one Member of Congress recently told a group of
advertising and media executives that trying to sell a product or
service without advertising would be like a bird trying to fly with-
out wings, and that metaphor captures better than most the mes-
sage I hope to leave with this subcommittee today.
Advertising permits the consumer to make an informed choice
from a range of options. I urge you not to clip its wings but to let
advertising carry its message without an additional burden that
would impede it from realizing its goal.
Thank you very much.
[The prepared statement follows:]
1186
Statement By
DeWittF. Helm, JR.
On Behalf Of
The association of National advertisers
And
The Advertising Tax Coalition
Before The
Subcommittee On Select Revenue Measures
Committee On Ways And Means
U.S. House of representatives
Washington, D.C.
September 8, 1993
Mr. Chairman, and members of the Subcommittee: Good morning. My
name is DeWitt F. Hehn, Jr. Before becoming President of the Association of
National Advertisers, Inc. (A.N.A.) ten years ago, I was President of the Miller-
Morton Company, then the consumer products subsidiary of a prominent
multinational diversified pharmaceutical company. Previously, I also served as an
advertising and marketing executive at Richardson- Vicks (now a part of Procter
and Gamble) and Pfizer, Inc.
I am appearing today on behalf of A.N A and the Advertising Tax Coalition
in strong opposition to a proposal that would impose a tax burden on advertising.
This proposal is both bad public poUcy and bad tax poUcy because it would damage
the business conmmnity; severely harm the media; and adversely impact efforts to
invigorate the economy.
A.N.A. represents virtually every segment of the business commimity. Our
broad corporate membership includes, within its entities, over 2,000 8ubsi(fiaries,
divisions, and operating units located throughout the United States. Our
members market a vast range of products and services smd employ advertising as
an important element of their selling and pubUc relations programs. A.N.A.'s
members collectively account for approximately 80% of all national and regional
advertising expenditures in the United States. Although A.N.A.'8 membership
includes most of the nation's largest advertisers, it also includes many smaller
companies. A nimiber of oiir members, for example, spend under 5 miiUion dollars
annually for advertising.
The ATC includes, in addition to our association, the American Advertising
Federation, the American Association of Advertising Agencies, the Direct
Marketing Association, the Grocery Manufacturers of America, the Magazine
Publishers of America, the National Association of Broadcasters, the National
Newspaper Association, the Newspaper Association of America, and the Yellow
Pages Publisher's Association. Together, the members of these organizations play
a dominant role in preparing and pubUshing or broadcasting the advertising
produced in this coimtry.
All the members of our Coalition strongly urge that Congress retjun the full
and current deductibility of advertising expenses. The full tax deductibihty of
advertising expenses provides enormous benefits to our nation's economy.
Advertising generates the sales that lead to corporate profitability ~ it is the most
efficient means of selling ever devised. A tax burden on advertising would
severely weaken an important economic engine that helps to create jobs, produce
sales, and generate corporate profits.
From the vantage point of a former company president, and an advertising
and marketing professional with over thirty-five years of real world experience, I
offer, for your consideration, my perspective of the likely impact of the advertising
tax proposal on the advertising and business communities. A business only has a
certain portion of its operating budget to allocate to advertising in the course of a
year, and any business will attempt to maximize the impact of its advertising. If a
limitation were to be imposed on tiie deductibility of advertising costs, it would
make the same amount of advertising more expensive. Like the Red Queen in
1187
Alice in Wonderland, companies would have to run faster (or in this case, make
larger expenditures) merely to remain in the same place.
If the tax deductibility of advertising is limited, companies would be forced
to consider one or more of the following options:
1. Decrease their expenditures for advertising;
2. Reduce their work force or mandate other expense reductions in an
effort to increase productivity so that they can apply "savings" to the
increased cost of advertising in order to maintain the same
communication levels.
3. Shift expenditures, where possible, from advertising to promotional
or other communication vehicles that will continue to be fully tax
deductible.
Before I expand on these three points, permit me to imderscore the effect
the recession already has had on business in general. As the Subcommittee
knows, many of this coimtrys most respected business entities have found it
necesseiry to lay off tens-of-thousands of workers and to close major installations
throughout this country in an effort to maintain economic viability and
competitiveness. These companies, like all others, soon will be facing higher
corporate taxes. A Umitation on the tax deductibility of advertising will further
increase their teix burden.
While companies can elect to decrease advertising budgets to compensate
for the reduced deductibihty of advertising, less advertising will translate into a
reduction in sales for companies' goods and services. Reduced advertising will
resonate throughout the economy. There will be less revenue for the advertising
agencies that develop advertising and the media which carry advertising
messages, including newspapers, television and radio stations, magazines, and
other specialty publications. Reduced advertising also will mean less revenue for
all those businesses that support and supply the advertising commimity.
Another option for companies will be to reduce their workforce, or to make
other expense reductions. Theoretically, the "savings" from these cutbacks could
be applied to a company's advertising budget in order to maintain cvirrent levels of
advertising. Some people have suggested that companies instead could pass these
higher costs on to the public. But, even a cxirsory reading of the business pages
demonstrates that in this economy, it is virtuedly impossible for companies to raise
prices. Companies that do risk a downturn in sales, and lower sales mean fewer
jobs in the long run. Most companies, as already noted, face higher costs and are
aggressively trimming budgets, and many now are la3ring off people in response to
growing economic pressure and increasing competition.
Faced with higher advertising costs, ainother strategy for companies will be
to shifl advertising expenditures to promotion, or other communication vehicles
that continue to be fully tax deductible. While it is well established that
advertising is the most efficient method of sellins to mass markets, less efficient
methods will become more attractive if advertisijig is made more expensive
because it is less than fully deductible. If advertising becomes more expensive,
companies may shift to other communication vehicles, and if these vehicles are
defined as advertising, companies may then resort to other options, including
reductions in levels of communication.
This scenario highlights the difficulty of defining what constitutes
advertising as compeinies concentrate on increasing public awareness of their
products and services. The word "advertising" is not a term of art - it does not
have any fixed or agreed upon definition. Even the most experienced practitioners
in the field often disagree as to what should be considered advertising and what
should be excluded. Nevertheless, the proposal to limit the deduction for
adverting costs will require the DepEutment of the Treasury to make such a
determination.
1188
How will this determination be made to insure a fair tax policy? Will direct
mail or signs in retail stores be considered advertising? What about decorated
shipping containers which protect the product and are also used for display
purposes? Should bramd or company logos on trucks, tee-shirts, or other wearing
apparel be defined as advertising? Should advertising be separated from other
related communication vehicles such as "^ubUc relations" and "promotion?" These
examples, of course, could be multiplied many times over. Developing working
concepts will be complex, time consuming, and impose high compliance costs. But,
all this highly technical effort and burdensome bxireaucratic expense
notwithstanding, these efforts still cannot avoid significantly hampering the
selling process.
The members of A.N.A. are among the country's largest employers and most
sophisticated advertisers. The three options I have outlined are the ones with
which they will be faced if advertising becomes less than fiilly tax deductible as a
business expense. But there are also hundreds-of-thousands of smzdl businesses
throughout the United States that will face the same difficult choices. These £ire
not just small manufacturers or service based businesses, but grocery stores, drug
stores, apparel stores, and hardware stores that make manufactiu-ers' products
available to consumers. At every step in the distribution process, advertising is
the most effective and most efBdent way to reach consumers - but taxing
advertising expenses will greatly reduce its efficiency.
When Wharton Econometrics Forecasting Associates, Inc. specifically
analyzed the issue of limiting advertising deductions as it impacts small business,
it concluded: "The impact of limiting the deductibility of advertising expenses
should have a larger negative impact on small business than on large business . . .
many new small business firms enter existing markets with the help of
advertising -- it will make it more expensive for new small businesses to obtain a
sufficient market share. These higher costs of entering markets will discotirage
the creation of new business and inhibit competition."
In fact, the advertising tax deductibility limitations proposal will impact
particularly heavily on companies ~ whatever their size - that are attempting to
introduce new products or break into new markets. These companies,
furthermore, wiU find themselves competing against companies that developed
market share at a time when they could immediately deduct 100% of their
advertising expenses. Placing a burden on advertising, a key tool of economic
competition, is clearly coimterproductive.
Advertising is merely an integral part of the total marketing mix. Any
"ordinary and necessary business expense" is geared to maximizing the sale of
goods and services. A business expense in job training, reseeirch and development,
public relations and advertising aU lead business to the same goal. In light of that
fact, is there any business, tax, or public policy purpose to be served by singling
out and discriminating {igainst advertising throu^ the tax code? I strongly urge
Congress not to head down the road of micro-managing the btisiness process
through differential tax treatment of the various segments of product development
and the selUng process. Furthermore, I believe that once we begin to head down
this road it w5l be extremely difficult to turn back.
Proponents of limiting the advertising tax deduction have argued that since
some advertising provides benefits for longer than one year, advertising costs
should not be permitted to be taken fully in the year incurred. Unfortunately,
while this argument initially may sotmd attractive, closer examination
demonstrates such an approach will be administratively unworkable and
economically damaging.
Most advertising is directed to the sale of a particular product or service in
a very limited time fi-ame. For example, supermarket advertising in newspapers
for food specials, national TV seasonal and holiday promotions, buyer incentive
programs, classified advertising for real estate, job openings, and a multitude of
other goods and services all serve to fill the advertising space of our national and
local media. To allow a small number of advertisements, that theoretically may
have an impact in more than one year, to create a precedent for all other
advertising is clearly unfair and inappropriate.
1189
Furthermore, no one knows whether a new advertising campaign will be
successful, or how long the efifects of the advertising will last. Yet this proposal
totally ignores the fact that most new product introductions, and their advertising,
fail in the marketplace. How should we capitalize, for tax purposes, the famous
campaign for the Edsel automobile? In fact, the number of new products being
brought into the market has expanded drastically in the last few years, but the
success rate has gone down. From 1980 to 1985, some 28,196 new items were
brought onto the market, but only 12% succeeded. From 1985 to 1990, amother
54,080 products were brought onto the market, but only 10% succeeded.
Advertising is not magic. Nothing kills a bad product faster than good
advertising. Without effective advertising, however, the odds of getting lost in the
clamor of the competitive marketplace has increased exponentially.
In 1989, the Advertising Tax Coalition asked two winners of the Nobel Prize
in Economics, the late Dr. George Stigler of the University of Chicago, and Dr.
Kenneth Arrow of Stanford University, to carry out a comprehensive and
systematic examination of proposals to change the tax treatment of advertising.
Their findings were published in August of 1990. "Advertising is a powerful tool of
competition," they wrote. "It provides vaduable information about products and
services in an efficient and cost effective manner. In this way, advertising helps
the economy to fimction smoothly -- it keeps prices low and facilitates the entry of
new products and new firms into the market."
Economists have long recognized the role of advertising in providing
information. The basic economic model of perfect competition assimies that
consumers have perfect information. In a groundbreaking study, for which he won
the Nobel prize, however, Stigler showed that constmiers rarely have such
information -- hence the need for advertising.
Stigler and Arrow also noted, "Since the information conveyed by
advertising is valuable, one must be particularly cautious about taxes that would
raise the cost, and hence lower the quantity of advertising. Such taxes would
reduce the overall flow of economic information available to consumers. As a
result, we expect that prices would rise, the dispersion in prices for particular
products woiild increase, and consimiers would be less able to find goods that
satisfy their preferences."
When commenting on the durability of advertising these two distinguished
scholars wrote, "Our works points out how very difficvJt it is to obtain any general
measure of the durability of advertising. In part, this is probably due to the fact
that advertising is an extremely heterogeneous product and thus not easily
measured; and in part, it is probably due to the fact that economists do not yet
have a good testable model of the way in which advertising affects sales. In either
event, we do not beUeve that existing economic evidence supports proposed
chamges in the tax treatment of advertising."
Stigler and Arrow concluded, "Although there are a number of economic
studies that suggest that advertising is long-lived, they are generally so fi-aught
with errors that one cannot rely on their findings. When we correct for some of
the statistical problems, we find that estimated duration intervals are much
shorter than originally thought. Moreover, there are a nimiber of studies
(partictdarly more recent ones) that suggest that advertising depreciates so
rapidly that virtually all of its effects are gone within a year."
Critics of advertising also have suggested that advertising should be singled
out for adverse tax treatment because other business expenses, in their view, such
as research and development, are somehow more vital to the nation's economy. It
is suggested that advertising is frivolous in comparison to these supposedly more
important functions. But this view totedly ignores the role advertising plays in our
economy. It often has been claimed, that "if you build a better mouse trap the
world will beat a path to yovu- door." However, many companies have found that
the improvements their research and development programs yield often are
completely nullified if they do not effectively bring this information to the
attention of the public through advertising.
1190
In summary, the proposed limitation on the deductibility of advertising
expenses is bad tax policy auid bad public policy. There is no evidence that tWs tax
would be absorbed automatically by corporate America without adversely affecting
corporate profits. If corporate profits sire reduced, the tax base itself would be
reduced so that this form of taxation could prove to be counter-productive. The
administrative burden on govenmient Eind business would be laborious aind
inefficient as government assumed the responsibiUty for manipulating and micro-
managing American business.
At best, our nation's economy is in a very sensitive phase - it would take
very little to throw it into a tail spin. Corporate tax rates already have been
increased significantly in the largest tax increase in our history. Even so, I believe
it is far preferable, more efficient, and much soimder tax and public policy to tax
business profits, as Congress recently has done, rather than to interfere with the
business process by taxing advertising.
The incentives for American business now should be, and must be, to
produce more profits ~ profits that will put people back to work. Let advertising
do its job by driving the economic engine that creates sales, corporate profits, and
employment. I urge you to reject disincentives that will be counterproductive,
ftnstrate business, stifle corporate profits, and increase unemployment.
One member of Congress recently told a group of advertising and media
executives that, "Trying to sell a product or service without advertising, would be
hke a bird trying to fly without wings." That metaphor captures better than most
the message I hope to leave with this Subcommittee today. Advertising to the
consimier, permits the consumer to make an informed choice fi-om a range of
options. I urge you not to clip its wings but to let advertising carry its message
without an additional burden that would impede it in realizing its goal.
1191
Mr. Payne. Thank you very much, Mr. Helm.
I feel like my colleague Mike Kopetski before me; I should an-
nounce my biases. I am strongly opposed to changing the tax treat-
ment of advertising based on my own business background and the
reliance of my business on consumer advertising, and second,
because my wife is the owner of an advertising agency in central
Virginia, and I feel like I may have heard this testimony before
somewhere.
I do have several questions, though, that I would like to pose to
this panel before we conclude. The first has to do, Mr. McConaghy,
with something you brought up. You mentioned the AICPA had
looked into this issue of advertising giving rise to benefits that ex-
tend beyond the current accounting period, and if that is true,
should they be capitalized and amortized for an additional period.
You mentioned that they had reached some conclusion. Could you
just comment once again on the findings of the AICPA on this
issue.
Mr. McConaghy. Sure. First, Mr. Chairman, the pressure obvi-
ously for financial saving purposes is to allow amortization, be-
cause that, of course, spreads the deduction and therefore adds
larger earnings per share. Nevertheless, with that pressure the fi-
nancial accountants in the AICPA concluded that there really is no
measurable future benefit. And therefore generally, except for one
or two isolated cases, advertising has to be deducted currently for
financial statement purposes and not capitalized.
Mr. Payne. Mr. Helm, it seems to me companies or corporations
or entities that are selling goods and services have options among
different media. They could advertise their products through a
broadcast medium, the newspaper, public relations efforts or any
number of ways. Could you comment on what kinds of changes
would occur within the advertising business if this particular pro-
posal became law?
Mr. Helm. Well, very simply, faced with this kind of a proposal
becoming law, companies would have two or three options. One
would be to simply reduce their expenditures in order to com-
pensate for the effect of the tax. That is going to result in less com-
munication, it will result in lower sales, it will result in lower cor-
porate profits, in my judgment, and therefore less tax revenue, and
so it will be counterproductive.
Another option is to try to reduce expenditures in other areas, be
it R&D, be it in selling expenses in order to effect quote savings
that can be applied to advertising. Frankly, I see this as placing
the Government in a position of micromanaging American busi-
ness, and I feel it would be much, much preferable to have the
Congress continue to generate revenue through corporate profit
taxes, through increases in the corporate profit tax. I am not advo-
cating still another one on top of the recent one, but my plea is to
tax profit, not interfere with process.
Mr. Payne. Would anyone like to comment then on how this pro-
posal would afiFect industries? Are there certain vvinners and losers
that might come about as a result of a proposal like this?
Mr. White.
Mr. White. Yes, I would be happy to. Clearly in the spectrum of
American business there are industries and individual companies
1192
that rely significantly more heavily, because of the inherent nature
of their business, on advertising as the mix of their total expenses
as opposed to, for instance, a more industrial-oriented company
which places a lot of its investment in the R&D area and in direct
contact with its customers, a much more Hmited customer base. So
the very nature of the proposal is inherently discriminatory against
those types of businesses that must of necessity rely more heavily
on advertising than those who don't.
Mr. Payne. Mr. Gibian.
Mr. Gibian. I would like to add a point as a tax lawyer, and what
would happen is that there would be a tremendous incentive for
tax lawyers to find, in the complexity area, the areas that did not
get disqualified as being current deductions, so you would have a
whole new profession built up of tax professionals who would be
trying to find ways and the means, no pun intended, to find those
expenditures which would be deductible, and that in turn would
create enormous complexity, as one of the other copanelists has
commented on.
Mr. Payne. Mr. White.
Mr. White. I think in addition to the straight complexity, it
would have the very real likelihood of pushing advertising market-
ing and promotional efforts in many directions that most of us con-
sider less desirable, more intrusive forms — telemarketing the direct
sales calls, and so forth. Advertising is a more passive and hence,
we believe, more benign approach to communication.
Mr. Payne. I want to thank you all very much for your testi-
mony. It will be very useful to us as we continue to consider this
and other revenue issues. Thank you very much.
Mr. Payne. Our fourth panel will continue testimony on the
issue of the amortization of advertising expenses, and testimony on
the depreciation of assets in the printing industry.
Would those who are carrying on conversations please take them
outside the hearing room so that we can continue with our next
panel.
Our first witness in this panel is with the Leadership Council on
Advertising Issues, Sheldon S. Cohen, counsel with Morgan, Lewis
and Bockius here in Washington, D.C.
Mr. Cohen, if you would proceed on the 5-minute rule please,
thank you.
STATEMENT OF SHELDON S. COHEN, COUNSEL, LEADERSHIP
COUNCm ON ADVERTISING ISSUES
Mr. Cohen. Mr. Chairman, I certainly will. And I will summa-
rize my testimony, I will not read it all. You have heard a lot today
and you have got a lot more to hear.
Mr. Payne. Thank you, Mr. Cohen.
Mr. Cohen. I would like to discuss with you briefly a summary
of my submission, why it is unsound economic and tax policy to
capitalize advertising costs and to amortize them over a number of
years.
It is elementary that advertising is an important element in our
national economy. It increases demand for products which reduces
their costs and results in the wonderful vibrant economy that is the
1193
envy of the world. Any change in the tax treatment will have seri-
ous economic ramifications.
Advertising costs have been treated as deductible items back to
the beginning of the modem income tax, and indeed I was studying
George Boutwell's manual to the 1862 income tax, and advertising
costs were deductible in those days. There really isn't any future
benefit, that has been discussed here.
The two or three instances where advertising results in capital
goods, that is signs or other materials that last for 1 year or more
than 1 year, or advertising campaigns that are directed toward fu-
ture sales, that is a product that isn't on the market yet. Those
costs right now have to be capitalized and amortized over the pe-
riod of your usefulness or those costs which relate to the creation
of a capital good have to be amortized. So we do have a dichotomy
now, some are deductible — most are deductible, a very limited clas-
sification are capitalized and amortized now, and I think the con-
cept that is thrown up here is misconceived.
An important element here, as has been discussed with you, is
the GAAP role and the AICPA statement. There the accountants
are working against their clients' interest, you see. The accountants
are saying that we don't want to let you amortize those costs be-
cause that will increase your earnings per share, and that might
be misstated, and therefore we want vou to reflect a more conserv-
ative income to the current owners of your stock. That is a careful,
well-thought through, well-conceived idea, and it goes to all of the
SEC full disclosure rules and the fact that one shouldn't puff one's
income, one shouldn't puff it for tax purposes, either.
The complications are myriad. Presently there are a number of
accounting treatments that are different for tax and for book-
keeping purposes. We should not multiply those because each one
creates another justification for another one, and each of those cre-
ates complications. They have to be accounted for separately, they
have to be reconciled to books. There are adjustments on the tax
return; the schedule M on the tax return has to justify those items.
Those are each complications both for the taxpayer and for the
Government, just equally for the Government.
I might remind the chairman that the chairman of the whole
committee, Mr. Rostenkowski, said in discussing this just last year
that the amortization, the rule that was put in for intangibles
would not be used as a justification for capitalizing advertising
costs and amortizing them over a period of time.
So, in summary, I would say that the committee has been search-
ing for a number of years now for ways to simplify the Internal
Revenue Code. One of the most important ways to simplify the In-
ternal Revenue Code is not to add complications. Certainly this
kind of concept would add further complications.
Thank you, sir.
[The prepared statement and attachments follow:]
1194
STATEMENT OF SHELDON S. COHEN
LEADERSHIP COUNCIL ON ADVERTISING ISSUES
TAX POLICY AMD ECONOMIC ISSDEfl RELATED TO
DEPyCTIBT^^ITY O? ApVEBTISiyq DMpEy fEDgRM. TAX LAW
I. Introduction
I am Sheldon S. Cohen, a partner in the law firm of Morgan,
Lewis & Bockius. I appear as a representative of the Advertising
Leadership Council, a coalition of major advertisers, advertising
agencies, and media companies." The Advertising Leadership
Council asked me to discuss why it is unsound, from a tax policy
and economic perspective, to require that advertising costs be
capitalized and amortized over a period established by statute.
Advertising expenses are a major component of the national
economy. Advertising encourages both competition and growth of
business. Advertising takes many forms, from commercials on
radio and television, to print advertisements in newspapers and
magazines, to billboards, blimps, and the sponsorship of sporting
events. It is used to introduce new products and services, or to
convey information about prices and availability. Advertising
reminds consumers of their favorable experiences with particular
products or services. Advertising does not motivate people to
purchase products with which they had an unfavorable experience
or which have not lived up to their expectations.
Any change in the present treatment of advertising costs
will have serious economic repercussions. Advertising costs are
deductible under present law because they are generally incurred
to produce current revenues. The amortization of advertising
costs over a period of years would distort the matching of these
expenses with related revenues and would greatly complicate the
filing of tax returns.
II. Federal Tax Treatment of Advertising Expenses
Section 162 of the Internal Revenue Code allows a current
deduction for ordinary and necessary business expenses.^
Section 263 prohibits deductions for any amount paid to acquire
an asset or to increase the value of any asset. The primary
effect of characterizing a business expenditure as either a
business expense or a capital expenditure concerns the timing of
the taxpayer's cost recovery. A business expense is currently
deductible, whereas a capital expenditure is usually amortized
over the life of the relevant asset.
Through sections such as 162 and 263, the Code endeavors to
match deductions with benefits over the period during which the
benefits are enjoyed. The matching of deductions and income
results in a more accurate calculation of net income for tax
purposes. Generally, if an expenditure produces significant
benefits that extend beyond the year in which the expenditure is
made, that expenditure is capitalized. An example would be legal
and accounting fees incurred in connection with a corporate
merger or acquisition.-' Moreover, if an expenditure contributes
to the creation or enhancement of a separate, identifiable asset,
that expenditure is generally capitalized and amortized.-' An
example would be costs incurred to develop a patent or trademark.
1/ A list of the members of the Advertising Leadership Council
is attached as an appendix hereto.
2/ All references to "sections" are to sections of the Internal
Revenue Code of 1986, as amended. The rule enunciated in
section 162 has been consistently applied since the advent
of the modern income tax early in this century.
3/ Indopco. Inc. v. Commissioner. 112 S.Ct. 1039 (1992).
4/ Commissioner v. Lincoln Savings & Loan Ass'n. 403 U.S. 345
(1971).
1195
Advertising expenses have long been recognized as ordinary
and necessary business expenses. All advertising expenses that
are reasonably related to the taxpayer's trade or business are
currently deductible, including amounts spent on goodwill or
institutional advertising.-' The law in this area is so
established that the IRS and the courts have rarely questioned
the deductibility of advertising expenses.
Proponents of capitalization of advertising expenses have
argued that such expenses produce benefits lasting beyond one
year, either in the form of future income or in the form of a
separate intangible asset like goodwill or product/brand-name
loyalty.^ They generally have been seeking this change as a
revenue-raising measure to offset changes which would cost
revenue. Advocates of this position erroneously state that
advertising produces benefits or revenues extending beyond the
current tax year.
Advertising costs do not produce significant benefits
extending beyond the current tax year. Product advertising —
such as a retail electronic store's advertisements for a holiday
sale — does not generate revenues beyond the period that the
advertisement is published or broadcast. Another example
familiar to most Washingtonians is the weekly advertising
supplement for Giant Food. This advertisement prominently
features the food and drug items on sale and the prices for such
items. The "product" being sold is the particular item at the
advertised price and this advertisement produces benefits for
Giant Food only so long as the company offers that product at
that price.
Institutional or goodwill advertising, such as a general
advertisement by a corporation to keep the corporation's name in
the minds of the public, generally does not generate revenues
beyond the current year. Institutional or goodwill advertising
is typically done by large companies, and usually on a regular
basis. There may be incidental future benefits from
institutional or goodwill advertising, but they are insignificant
and impossible to quantify. These benefits depend on each
individual consumer's recollection of an advertisement in a
future year. For example, if a consumer purchases a Toyota in
1994, is it due to the commercial he saw in 1992 or 1993, the
commercial he saw the night before he bought the car, or the
cumulative effect of seeing advertisements for a Toyota from 1992
through 1994?
Under present law, advertising expenses have been
capitalized in two instances. The first instance is when the
expenses relate to a tangible asset, such as a sign or a
billboard, or an intangible asset, such as the rights to package
designs. In this first instance, it is appropriate to amortize
the billboard or the package design over its useful life. The
second instance in which advertising expenses have been
capitalized is when the terms of the advertisement explicitly
extend beyond the current tax year, such as an advertisement for
a product that will be unavailable until the following year.
III. Matching Principle and Book/Tax Parity
As I have stated, the tax law attempts to match expenses
with the revenues generated by such expenses to accurately
measure net income for tax purposes. Generally accepted
accounting principles ("GAAP") have the same goal. While the tax
See, e.g. . Congressional Budget Office, Selected Spending
and Revenue Options, 134, June 1991 (hereinafter "CBO
Papers") .
1196
accounting treatment of an item is not necessarily dictated by
book accounting principles,-' those principles are often helpful
in deciding whether an expense should be deducted or capitalized.
There is currently no GAAP governing the treatment of
advertising costs. Some businesses deduct advertising costs when
paid or incurred whereas some businesses capitalize advertising
costs and amortize them over a period of years. However, an
AICPA subcommittee has promulgated a proposed Statement of
Position ("SOP") which would treat advertising costs as
deductible when paid or incurred unless (a) the advertising is
"direct-response advertising" or (b) the costs are for billboards
or blimps which are used for several advertising campaigns. I
understand that this proposed SOP has been approved by the FASB
and is set to be released this quarter.
If costs are for direct-response advertising, such costs
would be reported as "assets" and written off over the estimated
period of the benefits. The proposed SOP defines direct-response
advertising as advertising intended to persuade a customer to
purchase a company's products or services by responding
specifically to the advertisement (i.e. . by means of a coded
order form included with an advertisement, a coded coupon turned
in by a customer, etc.). This proposed rule is similar to the
rule for tax purposes, which requires capitalization of
advertising costs when it is certain that the benefits extend to
future periods.^'
The proposed GAAP exception for billboards and blimps is
identical to the rule for tax purposes. For example, a
corporation that uses signs or billboards to advertise its
products must capitalize the cost of the sign or billboard and
amortize it over the respective asset's useful life for federal
tax purposes.-'
Neither product advertising nor institutional and goodwill
advertising generate significant benefits or revenues beyond the
current tax year. Thus, it would be violative of the matching
principle to require that advertising costs be capitalized and
amortized over an arbitrarily determined period. Absent policy
justifications for departing from the matching principle, the tax
law should be consistent with book accounting principles.
Otherwise, you will add new complications to schedules required
to reconcile such differences.
IV. Capitalisation ot Advertising Costs Would Conflict With
Long-Standjng Case Law and IRS Rulings
A. Advertising costs do not create or enhance a
sepjirate intangible asset
The Supreme Court held in Lincoln Savings that premiums paid
by a savings and loan to the FSLIC for a secondary reserve fund
should be capitalized because the premiums created or enhanced a
7/ I.R.C. S 446(a); see Thor Power Tool Co v. Commissioner,
439 U.S. 522 (1979); see also American Auto. Ass'n v. United
States. 367 U.S. 687 (1961).
8/ See Rev. Rul. 68-283, 1968-1 C.B. 63 (amounts paid to a
corporation for advertising and promoting the taxpayer's
products at a fair resulted in benefits extending beyond one
year because the fair operated for six months in each of two
years) .
9/ See Alabama Coca-Cola Bottling Co. v. Commissioner. 28
T.C.M. (CCH) 635 (1969) (cost of "Coke" signs placed by a
bottler into retailers' stores had to be capitalized and
amortized over the useful lives of the signs) .
1197
separate and distinct additional asset (i.e. , the reserve
fund) .— As clarified by the recent Indopco decision, the
creation or enhancement of a separate asset, while not a
prerequisite to capitalization, will certainly suggest that
capitalization is appropriate.
Proponents of the capitalization of advertising costs
erroneously believe that advertising is a substantial contributor
to the creation of a separate intangible asset.— Their
argument is that a company's sales receipts would decline
dramatically if advertising were curtailed or eliminated. Thus,
advocates of this view reason that advertising creates an
assurance that customers will make purchases next week, next
month, and next year. They assert that this assurance of
continued customer purchases is itself an intangible asset, much
like purchased goodwill. Whether this intangible is denoted
"goodwill," "brand loyalty," or something else, its effects are
said to be long-lived. On this basis, it is stated that such
expenses are capital in nature and should be fully or partially
capitalized rather than deductible in the year incurred. -
The fundamental flaw in this analysis is a misunderstanding
of the functions performed by advertising. A decline in
advertising would certainly reduce a company's sales over time,
but this would be the result of a reduced amount of information
provided to consumers. It is simply untrue that long-term
customer loyalties — namely, the assurance that current
customers will buy a company's goods in future years — are
created by this year's advertising costs.
Although advertising is a valuable activity to advertisers
and consumers alike, advertising itself does not create something
of value. In fact, to serve its business purpose of conveying
information, advertising must be repeated over and over as it
does not have long-term staying power. Consider three categories
of advertising: (a) advertising of new, improved, or expanded
products or services, (b) advertising of products that are
available for a limited time or are on sale, and
(c) institutional or goodwill advertising.
First, for a new, improved, or expanded product or service,
advertising is critically important. New product advertising is
intended to generate immediate interest, attention, and sales.
Second, for time-sensitive information about a product or
service, such as a sale price or limited availability,
advertising is the most effective means of informing potential
customers about the product or service being offered. Grocery
stores and general merchandise retailers make extensive use of
such advertising on a daily or weekly basis. Automobile
dealerships and airlines and other businesses utilize such
advertising when they offer discount fares or other limited-time
features to consumers.
Long-term sales are not the purpose of either of these two
forms of advertising. Indeed, the information presented in such
advertising is usually out-of-date within a few days or weeks.
10/ Commissioner v. Lincoln Savings & Loan Ass'n. 403 U.S. 345
(1971).
11/ "A Little Too Creative, "Forbes. July 1990; James Dezart,
"New Turns in the Slugfest on Amortizable Intangibles,"
Mergers & Acquisitions. March/April 1991; "Time Is Right for
Washington to extend Tax Deductibility to Purchased
Goodwill," American Banker. March 20, 1991.
12/ See CBO Papers at 134.
1198
Such advertisements would be worthless or even counterproductive
if continued for an extended period.
The third general category of advertising, which appears to
have given rise to the amortization proposals, is institutional
or goodwill advertising. This is advertising intended to remind
customers of the company's name or to convey general information
rather than new product or time-sensitive information. Some have
argued that this category of advertising is an effort to develop
an intangible such as goodwill or brand loyalty that will bring
the customer back for additional purchases in future years. For
this reason, such advertising is thought to be a capital
expenditure rather than a deductible expense.
Granted, customers develop loyalties to a product or a
service. However, such loyalty is due to favorable experiences
in the past. Quality and reliability create repeat sales, as
well as encourage sales of a new product produced by a trusted
company. Many factors contribute to quality and reliability,
such as research and development, experienced and well-trained
employees, good technology and equipment, high quality-control
standards and so on. These are the expenses that produce the
intangible value. Advertising reminds the customer of his or her
satisfaction with that quality, but it does not create that
quality. Thus, advertising creates a short-hand summary for the
customer of the quality associated with the company or particular
product or brand name. The summary may come in the form of
specific information in an advertisement. Or, the mere mention
of a company name or brand name may trigger the customer's mental
summary .
Accordingly, while advertising performs critically important
informational functions, it does not create or enhance an
intangible asset with a useful life that extends beyond the
taxable year. The only intangible is the one created by the
quality of the customer's past experience with the product or
service.
B. Advertising costs do not create significant
benefits that extend beyond the current tax year
Some proponents of capitalization argue that advertising
produces benefits that extend beyond the year in which the
advertising occurred. This conclusion is unsupported by any
empirical evidence, principally because it is nearly impossible
to gather and measure any data to substantiate such a claim.
The Supreme Court's recent decision in Indopco does not
require the capitalization of advertising costs. In Indopco. the
Supreme Court found that merger expenses had to be capitalized
even though they did not create or enhance a separate asset. The
expenses at issue in Indopco related to a specific corporate
transaction. The Court relied on established precedent, which
held that expenses incurred in connection with a change in
corporate structure are capital expenditures. Moreover, the
transaction created unmistakable benefits extending beyond the
current year.
In the case of advertising, there is no corporate
transaction involved or other identifiable capital event. Thus,
there is simply no way to measure the duration or fact of any
future benefit generated by advertising. Of the three general
categories of advertising already discussed, only institutional
or goodwill advertising could be said to have long-term
effectiveness. However, numerous factors may combine to
influence the duration of an advertising campaign's success. -
13/ Kenneth J. Arrow, Economic Analysis of Proposed Changes in
the Tax Treatment of Advertising Expenditures. 1990 p. 22.
1199
The consumer's interest in the subject and ability to remember
must be considered.- These factors are so individualized as to
be virtually impossible to quantify. Additionally, the success
and duration of every advertising campaign is necessarily
affected by the intensity of the competition's advertising.—
Even advertising that is meant to have long-term results may
fail to do so. One of the most notoriously unsuccessful
advertising campaigns was that for the Edsel in the 1950s. The
advertisers of the Edsel hoped to present the public with a
product it would remember and enjoy for years, but the
advertising failed to do so. i^ A more recent example of failed
advertising was the advertising blitz for "New Coke," which not
only initially hurt Coca-Cola's business, but wound up helping
the company's sales in an area unintended by the "New Coke"
campaign, by ultimately increasing sales of "Classic Coke."
Advertising may also establish a company's name or product
in the mind of the consumer without increasing sales.— Economic
studies which have attempted to measure the lifespan of
advertising generally have been problematic, but most results
show that advertising depreciates rapidly with effects rarely
surviving as long as a year.-
It makes little sense then to capitalize an expenditure that
does not contribute to a significant benefit lasting beyond the
year in which the expenditure is made, particularly an
expenditure that is otherwise an "ordinary and necessary"
business expense. The current federal tax treatment of
advertising wisely reflects this reality. The Service has taken
the position in a 1992 revenue ruling that the Indopco analysis
is inapplicable to advertising expenses. According to the
Service, advertising expenses "are generally deductible
under . . . section [162] even though advertising may have some
future effect on business activities, as in the case of
institutional or goodwill advertising."^' Advertising expenses
are to be amortized only "in the unusual circumstance where [the]
advertising is directed towards obtaining future benefits
significantly beyond those traditionally associated with ordinary
product advertising or with institutional or goodwill
advertising. "23'
Finally, capitalization of advertising costs on the basis
that such costs create benefits extending beyond one year would
call into cjuestion the treatment of certain other ordinary and
necessary business expenses that arguably have a future benefit
component. For instance, reasonable compensation paid to an
officer is generally deductible under section 162 even though it
is reasonable to assume that the officer being paid currently is
engaged in long-term planning that extends beyond the current
year. Currently, the IRS and the courts require compensation to
be capitalized only when the recipient is performing services in
connection with a capital transaction. Otherwise, they do not
get involved in a case-by-case determination of whether the
recipient's services produce benefits beyond one year. This is a
14/ Id.
15/ Id.
16/ Id.
12/ Id.
18/ Id.
19/ See Rev. Rul. 92-80, 1992-2 C.B. 57.
20/ Id.
1200
complication which the Government and taxpayers can live better
without.
V. There is No Justifiable Policy Reason for Setting an
Arbitrary Write-off Period for Advertising Costs
As the previous discussion demonstrates, it is virtually
impossible to quantify the long-term benefits of institutional or
goodwill advertising. It has been recognized that, "because the
useful life of advertising depends on its unknown effect on
customers, any amortization rate would be arbitrary."—
Imposition of an arbitrary write-off period with absolutely no
basis in economic reality is unjustified, particularly given the
heavy administrative burdens that this proposal would inflict on
both taxpayers and the Government.
The proposal would require taxpayers to maintain annual
accounts of their advertising expenses for years to come and
would increase the Government's administrative costs of policing
this change in the law. If the tax law is changed to require
that advertising costs be capitalized, there would be different
treatment of advertising costs for tax and book accounting
purposes. Every new distinction between GAAP and tax accounting
creates new reconciliations to be accounted for as Schedule M-1
adjustments on Form 1120. This is a complicating factor for both
taxpayers and the Government.
In exchange for these heavy administrative costs, the
proposal would merely defer a portion of current costs to the
future. As such, the proposal would generate additional revenue
only in the first several years following enactment. To
illustrate this point, assume that a corporation spends annually
$100 on advertising and thus under current law deducts $100 each
year on its Form 1120 for advertising expenses. If, for the sake
of argument. Congress enacts a provision requiring amortization
of advertising expenses over a three-year period, the
corporation's $100 annual deduction would be limited only for the
first two years following enactment of the write-off provision.
In year one, the corporation would be entitled to deduct
only one-third of the $100 expense for year one, or $33, and, in
year two, the corporation would be entitled to deduct only one-
third of the $100 expense for year two and one-third of the $100
expense from year one, or a total of $66. Beginning in year
three, however, the corporation would be entitled to a $100
annual deduction, computed in year three as the sum of one-third
of the $100 expense for year three, one-third of the $100 expense
from year two, and one-third of the $100 expense from year one,
for a total of $100.
VI. Congress Has Reoeatedlv Chosen to Uphold the
Deductibility of Advertising Expenses
Like the IRS, Congress has also had a recent opportunity to
consider the deductibility of advertising expenses. As part of
the Revenue Reconciliation Act of 1993, Congress adopted new Code
Section 197, which permits goodwill and other intangible assets
to be written off over 15 years in certain circumstances. In
considering the breadth of this provision, Chairman Rostenkowski
reaffirmed the continued vitality of the deductibility of
advertising expenses: "Some persons have questioned whether this
bill [section 197 on amortization of intangibles] was intended to
21/ See CBO Papers at 134
1201
open the door for reconsidering tax deductions for advertising
expenses. Let me be clear. The answer is, no."—
VII. Conclusion
The historical treatment of advertising as a deductible
business expense is sound and reasonable and should be upheld.
Current deductibility of advertising costs comports with proposed
GAAP reporting requirements and is consistent with the tax law's
matching principle.
Advertising does not create goodwill, brand loyalty, or
similar intangibles. Customers' past experiences with a
product's or service's reliability and quality determine future
purchase decisions. Many expenditures contribute to the creation
of such quality, including research and development, employee
training, customer service, and the like. These are the
expenditures that create intangible value, not advertising costs.
Further, it is nearly impossible to establish that
advertising has any measurable effects on business that extend
beyond the year in which the advertising occurred. Thus,
establishment of an arbitrary write-off period with no basis in
economic reality would be unjustified.
22/ See Unofficial Transcript of Oct. 2 Ways & Means Comm.
Hearing on Amortization of Intangibles, 91 TNT 208-26
(Statement of Chairman Rostenkowski) , quoted in John W. Lee,
Doping Out The Capitalization Rules After Indopco. 57 Tax
Notes 669, 683 n.l26 (Nov. 2, 1992).
1202
Advertiainq Leadership Council
American Express Company
Backer Spielvogel Bates Worldwide, Inc.
Black Entertainment Television
D'Arcy, Masius, Benton & Bowles
Frito-Lay, Inc.
H. J. Heinz Company
Hublein
Interactive Telemedia
The Interpublic Group of Companies, Inc.
Kraft General Foods
Leo Burnett Company
Mars, Incorporated
Mattel, Inc.
Nestle U.S.A.
Nynex Corporation
Ogilvy & Mather Worldwide
Philip Morris Companies Inc.
Joseph E. Seagrams & Sons, Inc.
Tatham/RSCG
Time-Warner Inc.
Unilever United States, Inc.
Univision
The Washington Post Company
Young & Rubicam
1203
Mr. Payne. Thank you, Mr. Cohen.
The next paneHst is representing the National Retail Federation,
David Feeney, senior vice president in the corporate tax depart-
ment of R.H. Macy Co. in New York.
Mr. Feeney.
STATEMENT OF DAVID L. FEENEY, SENIOR VICE PRESIDENT,
CORPORATE TAXES, RJI. MACY AND CO^ INC., ON BEHALF
OF THE NATIONAL RETAIL FEDERATION
Mr. Feeney. Thank you. Mr. Chairman, members of the commit-
tee, my name is David Feeney. I am senior vice president, cor-
porate taxes, as you just pointed out, for R.H. Macy. I am pleased
to appear today on behalf of the National Retail Federation to ex-
press our opposition to a proposal to capitalize advertising costs
and amortize them over a period of years.
By way of background, the National Retail Federation is the Na-
tion's largest trade group that speaks for the retail industry. The
organization represents the entire spectrum of retailing, including
the Nation's leading department, chain, discount, specialty, and
independent stores, several dozen national retail associations, and
all 50 State retail associations. The federation's membership rep-
resents an industry that encompasses over 1.3 million U.S. retail
establishments, employs nearly 20 million people and registered
sales in excess of $1.9 trillion in 1992.
The retail industry would be severely harmed by a proposal to
capitalize advertising. Our industry relies on advertising to bring
customers into our stores on a day-by-day basis. This is an ordi-
nary and necessary cost of doing business for retailers. There is no
good tax policy basis for denying taxpayers the ability to deduct
these costs as incurred. It is also bad economic policy to increase
our cost of advertising, which directly affects sales. The ripple ef-
fect on the economy will be to reduce production and lower eco-
nomic growth.
Advertising fosters competition. When a business advertises
prices and quality, it forces competitors to lower prices and in-
crease quality. Advertising is also the means by which new prod-
ucts can enter into a market. Increasing the cost of advertising will
disproportionately hurt businesses that are trying to market new
products. The results will be less innovation and a drag on U.S.
global competitiveness.
Advertising also provides customers with an important source of
information about products, including price and quality. It provides
competition within the marketplace, and it also helps to bolster
consumer confidence. With consumer confidence at its current low
point, our Government cannot afford to adopt a policy that would
be a further detriment to consumer confidence. Rather, stronger
consumer confidence is needed to help generate an economic recov-
ery.
In addition, increased advertising costs will have a particularly
harsh impact on financially troubled retailers, some of which al-
ready may be in bankruptcy. Businesses that are strapped for cash,
and in particular financially troubled retailers, use advertising as
a means of producing a quick boost in sales and to increase their
cash flow. It would be diflficult for these businesses to bear the in-
1204
creased costs of this advertising. It may affect their abihty to sur-
vive, and it could result in a loss of jobs for manv Americans.
Under current law, advertising costs generally are deducted in
the year incurred as a cost of doing business. This is the same tax
treatment that is given to a myriad of other business expenses that
are generally considered period costs. Tax law also provides that
recurring expenditures are currently deductible because of the need
to renew the benefits through additional expenditures each year,
suggesting a useful life of less than a year. Advertising generally
is considered a recurring expenditure because taxpayers must regu-
larly engage in advertising activities in order to produce new busi-
ness on a relatively consistent basis in each year.
There is no tax incentive for engaging in advertising activities,
nor is there any other special "tax break" for advertising. Retailers
engage in advertising on a day-to-day basis in order to inform cus-
tomers about current products, prices, and to bring customers into
our store. Hopefully, this translates into immediate sales. The costs
of the business activity of generating sales are deducted from in-
come in the year incurred in order to properly match the revenues
with expenses of generating the revenues.
Other than serving as a revenue raiser, the tax policy basis that
has been suggested for requiring the capitalization of a portion of
advertising expenses is that the revenue stream or benefit ven-
erated from advertising extends to future years. From a retailer's
perspective, I can state emphatically that this is not the case. Re-
tail advertising is directed at the sale of goods directly to consum-
ers within a short period of time. The advertisement may announce
a sale of a product, a special promotion associated with the product
or the availability of the product at a particular store. In all of
these cases, the goal is to bring the customer into the store during
the time the sale or promotion is taking place. Again, the purpose
is to generate immediate sales. For example, a newspaper ad an-
nouncing the price of chicken for the coming week is designed to
bring customers into the store during that week to purchase chick-
en. The advertisement will have no value after that week.
Seasonal advertising is similar. Advertisement directed at
Christmas sales clearly are directed at short-term results, as are
sales of ski equipment, bathing suits, and other items of use only
during certain times of the year. In such cases, products that are
advertised for sale in a particular store this month may not even
be offered for sale in that store in future years.
Proposals to require capitalization of advertising expenses will
also add a great deal of complexity to the Tax Code. The primary
reason for the complexity will result from trying to make deter-
minations as to what activities actually constitute advertising. For
example, if an advertising agency is hired, are all fees paid to the
agency considered to be advertising, or are research and other con-
sulting services not advertising? Are salaries paid to store employ-
ees, who deal with ad agencies and do other advertising and mar-
keting activities, considered to be advertising costs?
If tne store puts its label in a coat that it sells, is that advertis-
ing? Is the store's name on the bill that it sends to its credit card
customers advertising? Are product demonstrations in the store ad-
vertising? Are telephone and mail solicitations advertising?
1205
If advertising is broadly defined, capitalization will be difficult
for the Internal Revenue Service to administer. However, if a nar-
rower definition of advertising is used, then sellers of goods and
services will be encouraged to switch to a form of marketing that
is deductible. Thus, the tax law will influence sellers to use a less
efficient means of marketing.
In either case, the issue of what constitutes "advertising" will
lead to innumerable controversies between taxpayers and the In-
ternal Revenue Service, leading to years of litigation. This is ex-
actly the opposite of the goals set by this committee to simplify our
overly complex tax system.
In summary, the National Retail Federation opposes any pro-
posal to restrict the deduction for advertising costs. Retailers rely
on advertising to bring customers into our stores and make sales,
which leads to stronger economic growth. There is no tax policy jus-
tification for limiting a retailer's deduction for this cost of doing
business. This would distort the basic premise of matching reve-
nues and expenses. In addition, advertising contributes to the sale
of new and innovative products, which are needed to keep our Na-
tion competitive. Finally, modifying the tax rules relating to adver-
tising would add a great deal of complexity to the Tax Code and
result in innumerable controversies between taxpayers and the IRS
over the definition of advertising.
Mr. Chairman and members of the committee, I thank you for
your time and kind attention.
[The prepared statement follows:]
1206
STATEMENT OF DAVID L. FEENEY
NATIONAL RETAIL FEDERATION
Mr Chairman, members of the Committee, my name is David L Feeney, Senior Vice President -
Corporate Taxes, of the R H. Macy & Co., Inc I am pleased to appear today on behalf of the
National Retail Federation to express our opposition to a proposal to capitalize advertising costs
and amortize them over a period of years.
By way of background, the National Retail Federation is the nation's largest trade group that
speaks for the retail industry The organization represents the entire spectrum of retailing,
including the nation's leading department, chain, discount, specialty and independent stores,
several dozen national retail associations and all 50 state retail associations. The Federation's
membership represents an industry that encompasses over 1.3 million U.S. retail establishments,
employs nearly 20 million people and registered sales in excess of $1.9 trillion in 1992.
The retail industry would be severely harmed by a proposal to capitalize advertising. Our industry
relies on advertising to bring customers into our stores on a day-to-day basis. This is an ordinary
and necessary cost of doing business for retailers. There is no good tax policy basis for denying
taxpayers the ability to deduct these costs as incurred. It is also bad economic policy to increase
our cost of advertising, which directly affects sales. The ripple effect on the economy will be to
reduce production and lower economic growth
Advertising fosters competition. When a business advertises prices and quality, it forces
competitors to lower prices and increase quality. Advertising is also the means by which new
products can enter into a market. Increasing the cost of advertising will disproportionately hurt
businesses that are trying to market new products. The results will be less innovation and a drag
on U.S. global competitiveness.
Advertising also provides customers with an important source of information about products,
including price and quality. It provides competition within the marketplace, and it also helps to
bolster consumer confidence. With consumer confidence at its current low point, our government
cannot afford to adopt a policy that would be a further detriment to consumer confidence.
Rather, stronger consumer confidence is needed to help generate an economic recovery.
Increased advertising costs will have a particulariy harsh impact on financially troubled retailers,
some of which already may be in bankruptcy. Businesses that are strapped for cash, and in
particular financially troubled retailers, use advertising as a means of producing a quick boost in
sales to increase their cash flow. It will be diflficult for these businesses to bear the increased cost
of this advertising.
Similarly, increased advertising costs will be harmful to small businesses, and especially small
retailers, that rely on increased sales as a result of advertising to provide the basis for building
their businesses.
Advertising Increases Short-Term Sales
Under current law, advertising costs generally are deducted in the year incurred as a cost of
doing business. This is the same tax treatment that is given to a myriad of other business expenses
that are generally considered period costs. Tax law also provides that recurring expenditures are
currently deductible because of the need to renew the benefits through additional expenditures
each year, suggesting a useful life of less than a year. Advertising generally is considered a
recurring expenditure because taxpayers must regularly engage in advertising activities in order to
produce new business on a relatively consistent basis in each year
1207
There is no tax incentive for engaging in advertising activities, nor is there any other special "tax
break" for advertising. Retailers engage in advertising on a day-to-day basis in order to inform
customers about current products and prices and bring customers into our stores. Hopefully, this
translates into immediate sales. The costs of the business activity of generating sales are deducted
from income in the year incurred in order to match revenue with the expenses of generating the
revenue.
Other than serving as a revenue raiser, the tax policy basis that has been suggested for requiring
the capitalization of a portion of advertising expenses is that the revenue stream or benefit
generated from advertising extends to future years. From a retailer's perspective, I can state
emphatically that is not the case. Retail advertising is directed at the sale of goods directly to
consumers within a short period of time. The advertisement may announce a sale of a product, a
special promotion associated with the product, or the availability of the product at a particular
store. In all of these cases, the goal is to bring the customer into the store during the time that the
sale or promotion is taking place. Again - the purpose is to generate immediate sales. For
example, a newspaper ad announcing the price of chicken for the coming week is designed to
bring customers into the store during thai week to purchase chicken — the advertisement will have
no value after that week. Seasonal advertising is similar Advertisements directed at Christmas
sales clearly are directed at short term results, as are sales of ski equipment, bathing suits, and
other items of use only during certain times of the year In some cases, products that are
advertised for sale in a particular store this month may not even be ofiFered for sale in that store in
future years.
Economic studies confirm that the value of most advertising is eliminated within one year. A
recent study co-authored by two Nobel Laureates in economics. Dr. Kenneth J. Arrow and Dr.
George G Stigler, concludes
[AJlthough there are a number of economic studies that suggest that advertising is long-
lived, they are generally so fraught with errors that one cannot rely on their findings.
When we correct for some statistical problems, we find that the estimated duration
intervals are much shorter than originally thought. Moreover, there are a number of
studies (particularly more recent ones) that suggest that advertising depreciates so rapidly
that virtually all of its effects are gone within a year. In short, the economic evidence does
not support the view that advertising is long-lived.'
Requiring Caoitalization Will Greatly Increase the Comnlexitv of the Tax Code
Proposals to require capitahzation of advertising expenses will add a great deal of complexity to
the tax code. The primary reason for the complexity will result from trying to make
determinations as to what activities constitute advertising and what activities do not. For
example, if an advertising agency is hired, are all fees paid to the agency considered to be for
advertising, or are research and other consulting services not advertising? Are salaries paid to
store employees who deal with ad agencies and do other advertising and marketing activities
considered to be advertising costs? If a store puts its label in a coat that it sells, is that
advertising? Is the store's name on the bills it sends to its credit card customers advertising? Are
product demonstrations in the store advertising'' Are telephone and mail solicitations advertising?
If advertising is defined broadly, capitalization will be difficult for the Internal Revenue Service to
administer However, if a narrower definition of advertising is used, then sellers of goods and
services will be encouraged to switch to a form of marketing that is deductible. Thus, the tax law
will influence sellers to use a less efiBcient means of marketing.
In either case, the issue of what constitutes "advertising" will lead to innumerable controversies
between taxpayers and the Internal Revenue Service — leading to years of litigation. This is
exactly the opposite of the goals set by this Committee to simplify our overiy complex tax system.
'Kenneth J. Arrow, George G. Stigler, Elisabeth M. Landes. and Andrew M Rosenfield, Economic Analysis of
Proposed Changes in Tax Treatment of Advertisine Expenditures. Lexicon, Inc., Chicago, April 1990 at 39-40.
1208
Conclusion
In summary, the National Retail Federation opposes any proposal to restrict the deduction for
advertising costs Retailers rely on advertising to bring customers into our stores and make sales,
which leads to stronger economic growth There is nc tax policy justification for limiting a
retailer's deduction for this cost of doing business This would distort the basic premise of
matching revenues and expenses In addition, advertising contributes to the sale of new and
innovative products, which are needed to keep our nation competitive. Finally, modifying the tax
rules relating to advertising would add a great deal of complexity to the tax code and result in
innumerable controversies between taxpayers and the Internal Revenue Service over the definition
of advertising.
1209
Mr. Payne. Thank you very much, Mr. Feeney.
Our next two witnesses will be testifying concerning the depre-
ciation of assets in the printing and publishing industry. We will
first hear fi-om Mr. Webber.
STATEMENT OF HOWARD C. WEBBER, JR^ CHAIRMAN,
COHBER PRESS, INC., ROCHESTER, N.Y., ON BEHALF OF THE
PRINTING INDUSTRIES OF AMERICA, AND GRAPHIC ARTS
LEGISLATIVE COUNCIL
Mr. Webber. Thank you. Mr. Chairman, members of the sub-
committee, mv name is Howard C. Webber, Jr. I am the chairman
and CEO of Uohber Press, Inc., a 58-employee commercial printing
firm located in Rochester, N.Y. I am a former chairman of the
board of the Printing Industries of America, the largest printing
and graphic arts trade association in the United States, with over
14,000 member companies.
I am appearing before you today on behalf of the Graphic Arts
Legislative Council, a group of national graphic arts associations
formed in 1988 to provide a forum for addressing legislative and
regulatory proposals before Federal and State government. The
council consists of 14 associations representing every aspect of the
printing and graphic arts industry.
Mr. Chairman, it is important to understand the printing and
publishing industry is comprised of several key segments. Publish-
ers are those companies which publish periodicals, books, and other
items but who do not own printing equipment. Newspaper publish-
ers are those who both publish and print newspapers. The remain-
der of printing and publishing, or roughly half the total of the en-
tire industry, is commercial printing and activities related to com-
mercial printing. While these companies print books and maga-
zines, they also print many newspaper inserts, newsletters, adver-
tising materials, labels, forms, wedding invitations, and virtually
every other item where an image is created on some type of sur-
face.
Let me just spend a moment describing today's commercial print-
ing industry. Commercial printing is the largest manufacturing in-
dustry in tne Nation in terms of number of establishments. Over
42,000 firms generating $79 billion in sales employ more than
820,000 individuals. Unlike many U.S. manufacturers we have wit-
nessed steady increases in productivity while watching employment
and average wages increase as well. We also are a net exporter,
having enjoyed a favorable balance of trade for many years.
Mr. Chairman, my comments today are directed toward item No.
2 under the cost recovery section of the August 17 press release
which was a proposal to extend the recovery period applicable to
certain assets used in printing and publishing to 10 years. As I un-
derstand the proposal, it would shift equipment which is today on
a 7-year depreciation schedule, including press equipment, bindery
equipment and certain prepress equipment such as electronic scan-
ners, to a 10-year schedule.
I must tell you, in all honesty, that this proposal has been met
with shock, disbelief and genuine outrage by an industry that is
still climbing back to health after the recent recession. Because our
industry is comprised of a high number of small family-owned en-
1210
terprises, the most successful of which have already taken a hit
this year from the recent reconciliation bill which increased the
rates of subchapter S corporations, we are already concerned about
generating the capital necessary to keep our plants up to date and
competitive.
Printing is a capital-intensive industry that has been revolution-
ized in recent years by rapid changes in technology. Even the cur-
rent 7-vear depreciation schedule is often inadequate to allow for
the full recovery of equipment investments. Stretching the depre-
ciation schedule out to 10 years not only fails to take into account
the reality of today's printing environment but it unfairly singles
out our industry relative to other American manufacturers.
It used to be we kept a printing press for 8 to 10 years and only
replaced it because it wore out. Today, however, we replace our
equipment in 5 to 7 years, primarily because new technologies are
constantly evolving. Investing in this new technology can give a
printer a competitive edge in a particular market segment.
In view of the rapid changes in technology, any changes in the
depreciation schedule for our industry should be geared toward re-
ducing the term such as a 5-year schedule used in Grermany rather
than increasing the schedule far beyond the useful life of a product.
However, we do not come to Congress to propose a shorter depre-
ciation schedule. In fact, the commercial printing industry has
never approached this committee for a tax break or a special pro-
gram.
Instead, someone in Congress took it upon themselves to suggest
a change in our depreciation solely based upon the need for in-
creased Federal revenue rather than out of any interest to adjust
the schedules to economic reality. If the proposal were part of a
broad review of depreciation schedules for all industry, we would
be happy to make our case for retaining the present schedules, but
on this issue printing has been singled out as the only industry to
take a direct hit, and the proposed changes have nothing to do with
the actual use of equipment in our plants today.
Contrary to the predictions of many, the market for printed prod-
ucts is larger than ever and shows every indication of continuing
steady growth well into the future. Remember the paperless office?
If your office is anything like mine, it has more paper in it today
than ever before. Yes, much of it is photocopied, but even with the
tremendous growth in photocopying, demand for printing has con-
tinued to grow. Many predicted that the advent of the personal
computer would mark the end of traditional printing, yet imagine
a book store today without computer magazines and books and
imagine your PC without volumes of software manuals and instruc-
tion material, all of it printed by our industry. The advent of the
computer age has resulted in more printing, not less.
The greatest impact of these new technologies on printing has
been the way the technologies themselves have been utilized in the
printing process. The computer chip is now an integral part of al-
most every new piece of equipment in the industry. As new mar-
kets for printed material develop, competition for the latest press
technology to enable a printer to maintain a competitive edge
grows sharper.
1211
At a time when this industry is growing at a rate faster than the
gross national product and when we are enjoying a favorable trade
balance, this committee should be taking steps to urge us to ex-
pand, not contract. In the name of the 42,000 small firms making
up this industry, we urge you not to ask the printing industry to
slow its growth solely for additional revenue.
Mr. Chairman, I have attached a chart on the next page which
you have, I believe, which demonstrates the effect of the proposed
change on printers of varying size.
I want to thank you for this opportunity to appear before you
today. Thank you.
[The statement and attachment follow:]
1212
STATEMENT OF HOWARD C. WEBBER, JR., ON BEHALF OF PRINTING
INDUSTRIES OF AMERICA, AND GRAPHIC ARTS LEGISLATIVE COUNCIL
Mr. ChaiiTOan, memben of the Subcommittee, my name is Howard C. Webber, and I am the
chainnan and chief executive ofRca of Cohbo- Press, Inc., a 58 employee commercial printing
firm located in Rochester, New York. I am a foimer Chainnan of the Board of Printing
Industries of Amoica, the largest printing and graphic arts trade association in the United States
with ova- 14,000 member companies.
I am appearing before you today on behalf of the Graphic Aits Legislative Council (GALQ, a
group of national graphic aits associations formed in 1988 to provide a forum for addressing
legislative and regulatory proposals before federal and state government. The Council consists
of 14 associations representing every aspect of the printing and gr^hic aits industry.
Mr. Chairman, it is important to understand that the "printing and publishing industry" is
comprised of several key segments. Publishers are those companies which publish periodicals,
books, and otha items but who do not own printing equipment. Newspaper publishers are those
who both publish and print newspapers. The remainder of "printing and publishing," or roughly
half the total of the entiie industry, is commercial printing and activities related to commaxnal
printing. While these companies print books and magazines, they also print many newspaper
insots, newsletters, advertising materials, labels, forms, wedding invitations, and virtually every
other item where an image is created on some type of surface.
L^ me spend a moment describing today's commercial printing industry. Commercial printing
is the largest manufacturing industry in the nation in terms of numbers of establishments. Over
42,000 firms generating $79 billion in sales employ more than 820,000 individuals. Unlike many
U.S. manufacturers, we have witnessed steady increases in productivity while watching
anployment and average wages increase as weU. We are also a net exporter, having enjoyed a
favorable balance of trade for many years.
Mr. Chairman, my comments today are directed toward item number 2 under the cost recovery
section of the August 17 press release which was "a proposal to extend the recovery period
q>plicable to certain assets used in printing and publishing to 10 years." As I understand this
proposal, it would shift equipment which is today on a 7 year deineciation schedule, including
press equipment, bindery equipment and certain prepress equipment such as electronic scanners
to a 10 year schedule.
I must tell you in all honesty, that this proposal has been met with shock, disbelief, and genuine
outrage by an industry that is still climbing back to health after the recent recession. Because
our industry is comprised of a high number of small family-owned enterprises, the most
successful of which have already taken a hit this year from the recent reconciliation bill which
increased the rates on Subch^>ter S corporations. We are aheady concerned about generating
the capital necessary to ke^ our plants up to date and competitive.
Printing is a cental intensive industry that has been revolutionized in recent yeais by rapid
changes in technology. Evea the current 7-year depreciation schedule is often inadequate to
allow for the fuU recovoy of equipmoit investments. Stretching the depreciation period out to
10 years not only fails to take into account the reality of today's printing environment, but it
unfairly singles out our industry relative to other American manufactures.
It used to be that we kept a printing press for 8-10 years and only replaced it because it wore out
Today, however, we replace our equipment in 5-7 years primarily because new technologies are
constantly evolving. Investing in this new technology can give a printer a competitive edge in
a particular market segment In view of the rapid changes in technology, any changes in the
dqjreciation schedule for our industry should be geared toward reducing the term, such as the
five year schedule used in Germany, rather than increasing the schedule far beyond the useful
life of a product
However, we did not come to Congress to propose a shorter depreciation schedule. In fact, the
corrmiercial printing industry has never ^jproached this conmiittee for a tax break or special
program. Instead someone in Congress took it upon themselves to suggest a change in our
depreciation solely based on the need for increased federal revenue rather than out of any interest
to adjust the schedules to economic reality. If the proposal were part of a broad review of
1213
depreciation schedules for all industry, we would be happy to make our case for retaining the
present schedules. But on this issue, printing has been singled out as the only industry to take
a direct hit and the proposed changes have nothing to do with the actual use of equipment in our
plants today.
Contraiy to the predictions of many, the market for printed products is largo- than ever, and
shows every indication of continuing steady growth well into the future. Remembe- the
"pEqierless office?" If your office is anything like mine, it has more papa in it today than ever
before. Yes, much of it is photocopied. But even with the tremendous growth in photocopying,
demand for printing has continued to grow. Many predicted that the advent of the personal
computer would mark the end of traditional printing. Yet imagine a bookstore today without
computer related magazines and books and imagine your PC without volumes of software
manuals and instructional material, all of it printed by our industry. The advent of the computer
age has resulted in more printing, not less.
The greatest impact of these new technologies on printing has been the way the technologies
themselves have been utilized in the printing process. The computer chip is now an integral part
of almost evoy new piece of equipment in the industry. As new markets for printed material
develop, competition for the latest press technology to enable a printer to maintain a competitive
edge grows sharper.
At a time when this iiufaistry is growing at a rate faster than the Gross National Product and
when we are enjoying a favorable trade balance, this committee should be taking st^M to urge
us to expand, not contract. In the name of the 42,000 small firms making up this industry, we
urge you not to ask the printing industry to slow its growth solely for additional revenue.
Mr. Chairman, I have attached a chart on the next page which demonstrates the effiect of the
proposed change on printers of varying size. I want to thank you for this opportunity to ^>pear
before you today.
Members of the Graphic Arts Legislative Council include: Book Manufacturers ' Institute, bic.
Envelope Manufacturers Association of America, Flexographic Technical Association, Inc., Foil
Stamping and Embossing Association, bttemational Association ofDiecutting and Diemaking,
baemational Prepress Association, bttemational Reprographic Association, National Association
of Printers and Lithographers, National Association of Printing bik Manufacturers, bic.. National
Association of Quick Printers, bic.. North American Graphic Arts Suppliers Association, Printing
Industries of America, bu:.. Research and Engineering Coundl of^ Graphic Arts bidustry, bic
and Typographers bttemational Association.
Mr. Howard C Webber, Jr. Graphics Arts Legislative Council
Cohber Press, bK. c/o Printing Industries of America
1000 John Street 100 Daingerfield Road
P.O. Box 93100 Alexandria, VA 22314
Rochester, NY 14692 Contact: Benjamin Y. Cooper
(716) 475-9100 (703) 519-8158
77-130 0-94 -7
1214
^ *
53
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t^ ft,
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<S
cs
.1
n
1215
Mr. Payne. Thank you, Mr. Webber.
Our last witness, representing the Association for Supphers of
Printing and Publishing Technologies, is Mark Nuzzaco, director of
government affairs.
STATEMENT OF MARK J. NUZZACO, DIRECTOR OF GOVERN-
MENT AFFAIRS, NPES, THE ASSOCIATION FOR SUPPLIERS
OF PRINTING AND PUBLISHING TECHNOLOGIES
Mr. Nuzzaco. Thank you. Good afternoon. My name is Mark
Nuzzaco. I am director of government affairs for NPES, the Asso-
ciation for Suppliers of Printing and Publishing Technologies.
We thank tne chairman and subcommittee tor the opportunity of
appearing before the subcommittee to comment on a proposed
change in the tax law extending to 10 years the recovery period for
certain assets used in printing and publishing. We feel that such
a change would be very detrimental to the economic recovery and
long-term vitality of our industry and our customers.
My full statement, which has been submitted for the record,
elaborates on our opposition to this proposal. For purposes of to-
day's hearing, I will summarize our concerns.
Before beginning my comments, I would like to acknowledge that
I am pleased to share the witness table today with Mr. Webber,
chairman of Cohber Press, Rochester, N.Y., representing our sister
association, Printing Industries of America, which is comprised of
thousands of our members' customers, and the Graphics Arts Leg-
islative Council. In light of the subcommittee's full agenda, my re-
marks are intended to complement Mr. Webber's testimony.
NPES represents approximately 300 companies which account
for about 90 percent of domestic production of printing and publish-
ing technology. Nearly 60 percent of NPES's members are small
businesses with gross sales of $5 million or less.
The printing and publishing technologies industry provides an
enormous variety of products and supplies to meet the needs of the
printing and publishing industry and its many segments. It is an
arena in which societal trends, fast-moving technology and intense
competition are all helping to shape the future.
The most obvious of the assets used in this industry, printing
presses, represent just one stage in the long and technically com-
plex task of transforming ideas into printed materials. However,
many other technologically sophisticated products are also em-
ployed in the industry.
The total market for printing equipment in 1992 approached $2.1
billion in orders and was slightly over $2.1 billion in product ship-
ments. The relatively modest size of the printing and publishing
technologies industry belies its critical role in supporting the much
larger, crucially important graphics communication industry that
has been described by Mr. Webber.
Until just a few years ago, most information was disseminated
by publications that were printed by one of four major printing
processes. Today, however, we are witnessing a broad expansion of
communicational alternatives, largely based on rapidly changing
technologies.
The proposal to extend to 10 years the recovery period for certain
assets used in printing and publishing is detrimental to the graphic
1216
communication industry's need for improved quality and productiv-
ity. Currently, assets used in printing and publishing are defined
to have an 11-year class life and are in the 7-year modified acceler-
ated cost recovery system class for depreciation. These assets would
include printing presses and machinery used in the bindery.
In light of the new technological changes to this traditional
equipment, even the current 7-year depreciation period exceeds the
commercial life of much of this machinery. Extending the capital
cost recovery period by nearly another 50 percent to 10 years would
clearly be the wrong policy to adopt at a critical point in the indus-
try's recovery from the economic downturn we have just endured.
Historically, the industry has had an electromechanical orienta-
tion. However, in 1979 the technological revolution began in the
graphics arts industry with introduction of the color electronic
prepress system. With this product computers were introduced to
the printing process, and that change more than any other caused
a fundamental change in the printing and publishing industry. Be-
fore this era in the mid 1970s, printing press speeds were just one-
third of today's top speeds of over 3,000 feet per minute. It took 10
years to increase from 1,000 to 1,500 feet per minute. But speeds
have doubled to over 3,000 feet per minute in just the last 7 years.
Clearly, the rate of change is increasing dramatically. At such
speeds, computerized controls were required.
At the same time, the 1980s witnessed the color revolution in the
printing and publishing industry. Advertisers demanded more and
higher quality color. This color revolution fueled rapid growth in
the printing market and demanded new and more sophisticated
technology.
As rapidly as press technolo^ is changing, innovation in the
prepress area is occurring even faster. The conversion from analog
to digital data use is an underlying cause of the change. This tran-
sition is forcing vendors to focus on the development and sale of
discreet products that can be indiscriminately interchanged by the
user.
This situation is similar to what has already happened in the
electronic office environment. As we have continued to see in the
"plug and play" environment of the electronic office, standards-
based prepress products will also require more frequent revision
and/or replacement, thus requiring routine upgrade to stay com-
petitive.
As long as printers have been putting ink to paper, the quest for
greater output and better quality witn fewer man hours and re-
duced waste has been the driving force for every press manufac-
turer. Today's technologies have taken this quest to even a new
level. Today's increasingly rapid, technological advances are yield-
ing faster production speeds, quicker make-readies, reduced run-
ning and make-ready waste, better flexibility and quality over a
range of jobs, less downtime and, more importantly, the ability to
compete better with other communications vehicles.
New orders for printing equipment are expected to rise 12 per-
cent this year and 6 percent in 1994. Shipments of imaging and
prepress equipment systems, in essence, computers and the soft-
ware needed to run them, are expected to rise about 10 percent
this year and 8 percent in 1994. While these are respectable gains.
1217
they lag far behind the 15 to 20 percent growth rates of the com-
puter industry generally. This is because the technological revolu-
tion is incompletely implemented in the printing industry because
of a lack of cash flow and ability to borrow, especially by smaller
printing companies.
Capital spending, after getting off to a good start in the first
quarter, abruptly reversed course when the Clinton administration
announced it would not reinstate the investment tax credit after
all. Although the provision of the Omnibus Budget Reconciliation
Act of 1993 increasing the expenses deduction for small businesses
from $10,000 to $17,500 is helpful, its incentive for investment will
be severely eroded by the extension of the depreciation period to 10
years as called for in this proposal.
Rather than impeding investment, especially productivity-im-
proving capital expenditures by small businesses, Congress should
be looking for ways to encourage capital formation and investment
in new technologies necessary for a revitalized industrial infra-
structure.
Mr. Chairman, we respectfully urge you to adopt such a course,
and reject the current proposal. We thank you for the opportunity
to present these comments. I would be pleased to answer any ques-
tions or submit additional information for the record.
Thank you.
[The prepared statement follows:]
1218
STATEMENT BY
MARK J. NUZZACO
DIRECTOR OF GOVERNMENT AFFAIRS
NPES THE ASSOCIATION FOR SUPPLIERS OF PRINTING AND PUBLISHING
TECHNOLOGIES
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE MEASURES
OF THE
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
SEPTEMBER 8, 1993
I. INTRODUCTION
Good Morning. My name is Mark J. Nuzzaco. I am Director of Government Affairs
for NPES The Association for Suppliers of Printing and Publishing Technologies. I am here
today representing the thousands of women and men who comprise a basic industry that is
part of our nation's industrial backbone. On their behalf I thank you Mr. Chairman for the
opportunity of appearing before the Subcommittee on Select Revenue Measures to comment
on a proposed change in the tax law extending to ten years the recovery period for certain
assets used in printing and publishing. We feel that such a change would be very detrimental
to the economic recovery and long-term vitality of our industry. My full statement, which
has been submitted for the record, elaborates on our opposition to this proposal. For the
purpose of today's hearing I will summarize our concerns.
Before beginning my comments, I would also like to acknowledge that I am pleased
to share the witness table today with Mr. Howard C. Webber, Jr., President, Cohber Press,
Rochester, N.Y., representing our sister association Printing Industries of America, which is
comprised of thousands of our members' customers, and the Graphic Arts Legislative
Council. In light of the Subcommittee's full agenda, my remarks are intended to compliment
Mr. Webber's testimony.
A. NPES The Association for Suppliers of Printing and Publishing Technologies
NPES The Association for Suppliers of Printing and Publishing Technologies is a
national trade association whose member companies are engaged, within the United States, in
building, manufacturing, repairing, selling, importing for sale, or distributing printing and
publishing technologies used in the graphic communications industries. NPES membership
currently stands at approximately 300 companies which account for about 90% of domestic
production of printing and publishing technologies. Nearly 60% of NPES members are small
businesses with gross sales of $5 million or less annually.
B. The Printing and Publishing Technologies Industry
America's graphic communications industry requires an enormous variety of products
to do its work. The printing and publishing technologies industry provides the products and
supplies that meet the needs of the printing and publishing industry and its many segments.
These segments include commercial printing, corporate publishing, magazines and
periodicals, newspapers, book printing and publishing, business forms, packaging, specialty
printing, trade services, graphic design houses, advertising agencies and desktop publishers
using lithographic, letterpress, flexographic, gravure, screen, and non-impact processes. It is
1219
an arena in which societal trends, fast-moving technology, and intense competition are all
helping to shape the future.
The most obvious of the assets used in this industry, printing presses, represent just
one stage in the long and technically complex task of transforming ideas into printed
materials. Every printing job, from the simplest to the most elaborate, goes through the
same basic processes: prepress, press, and bindery.
The products employed in the printing industry include typesetting systems, page
composition systems, negative and plate-making equipment, presses of all types, press
accessories and binding and finishing apparatus. Printing supplies include papers, films,
plates, and chemicals for photo typesetting and other prepress functions.
Printing Trades Machinery (SIC 3555) is identifiable as a discrete category within the
more general classification of Special Industry Machinery of the Department of Commerce's
Standard Industrial Classifications System (SIC). The total market for printing equipment in
1992 approached $2.1 billion in orders and was over $2.1 billion in product shipments.
The graphics arts supplies portion of the industry is less readily identified, as these
products typically are not aggregated as a separate group, but are spread across several
broader industry categories, such as chemicals and photographic supplies.
C. America's Graphic Communications Industry
The relatively modest size of the printing and publishing technologies industry belies
its critical role in supporting the much larger, crucially important graphic communications
industry. With establishments in virtually every town and county, products of the U.S.
printing and publishing industry serve the country's diverse communication needs.
According to the 1992 Census of Manufacturers, of the 20 major manufacturing groups
included in the SIC, printing and publishing ranks third in the number of establishments.
There are more than 60,000 printing establishments nationwide, employing some 1.55
million people.
' Until just a few years ago most publications were printed by one of the four major
printing processes (offset lithography, gravure, flexography, and letterpress). That being the
case, the industry's users, vendors, technologies and products were focused on the printing
process and meeting its requirements.
Today, however, we are witnessing a significant industry refocus from printing to
publishing, which will also include the broad world of communications by later in the
decade. As a result, in addition to printing, many of the same publications may be: 1)
reproduced by a xerographic electronic publishing system; 2) provided as an electronic
database (for example: airline scheduling, legal records, etc.); and/or 3) distributed on
magnetic media (for example: CD-ROM). This "non-traditional" focus represents a
substantial shift in the industry's perspective, made possible due to a wide range of factors.
This broad expansion of communication alternatives, largely based on rapidly changing
technologies, offers both major challenges and opportunities for traditional printers and their
suppliers.
1220
n. THE PROPOSAL TO EXTE^fD TO TEN YEARS THE RECOVERY PERIOD
FOR CERTAIN ASSETS USED IN PRINTING AND PUBLISHING IS
DETRIMENTAL TO THE GRAPHIC COMMUNICATION INDUSTRY'S NEED
FOR IMPROVED QUALITY AND PRODUCTIVITY
Currently, assets used in printing and publishing are defined to have an 11 year class
life and are in the 7-year MACRS class for depreciation. These assets would include
printing presses, and machinery used in the bindery. In light of the new technological
changes to this traditional equipment, even the current 7-year depreciation period exceeds the
commercial life of most of this machinery. Extending the capital cost recovery period by
nearly another 50% to ten years would clearly be the wrong policy to adopt at a critical point
in the industry's recovery from the economic downturn we have just endured. To help put
this in context, let me tell you about the rapidly changing nature of the technology at issue.
A. Printing and Publishing and the Increasingly Competitive Communications
Market
There are a number of trends shaping the outlook for the printing and publishing
industry. A major factor is the impact of electronic technologies on the use of printing
materials. In entertainment we have interactive video. In advertising we have multi-media
and cable TV. In the business marketplace we have digital technologies, multi-media and
interactive video. The same products impact the education and research arena. Not long ago
print was the sole domain of communication. Then came radio, TV, cable and today we
have multi-media, digital data bases, CD Rom and other technologies that all compete with
printing and publishing.
B. The Eighties - A Decade of Rapid Technological Change
The printing and publishing industry is a bit of a paradox. It is an old, mature
industry on the one hand. But on the other hand, it's an industry facing rapid technological
change mainly due to the adoption of computer technology to a craft-oriented process.
Historically, the industry has had an electromechanical orientation. Phototypesetting
was the predominant way to prepare text for printing. Graphic arts cameras and, to a certain
degree, analog scanners were in use to digitize photographic images for printing. However
in 1979 a company called Scitex launched a new product, the color electronic prepress
system and began a technological revolution in the graphic arts industry. With this product,
computers were introduced to the printing process and that change, more than any other,
caused a fundamental change in the printing and publishing industry. In addition to the
introduction of the color electronic prepress system, a number of other major innovations
happened in the 1980's that had a dramatic impact on the industry.
Before this era, in the mid-1970's printing press speeds were just one-third of today's
top speeds of over 3,000 feet per minute. It took ten years to increase from 1,000 to 1,500
feet per minute. But speeds have doubled to over 3,000 feet per minute in just the last seven
years. Cleariy, the rate of change is increasing dramatically. At such speeds, computerized
controls were required so that register was maintained throughout the run length and that
quality could be insured from impression #1 to the final impression on the job. Automation
of press equipment was the means that allowed these increased press speeds. Similarly,
1221
automation in the bindery improved the throughput, so that the entire printing process from
"cradle to grave" was much faster, efficient and reliable.
Two other product introductions in the mid 1980's continued the rapid revolution in
the printing industry: the laser printer and Postscript. These two introductions changed the
way images and text were prepared for printing. In combination with a software program by
Aldus Corporation entitled PageMaker, these low-end (inexpensive) systems allowed a whole
new group of individuals to create pages and become involved in the printing and publishing
process. This phenomenon was called desktop publishing by Paul Brainerd, the founder of
Aldus.
At the same time the 80's witnessed a color revolution in the printing and publishing
industry. Advertisers demanded more and higher quality color. The notion that color sells
became the dominant theme in the marketing of products. In order to compete with network
TV, cable TV and other media, printers had to produce higher quality color on a consistent
basis. In addition, the launching of USA Today by the Gannett Corporation brought color
into everyone's home or office on a daily basis.
This color revolution fueled rapid growth in the printing market, and demanded new
and more sophisticated technology. One and two color presses were no longer the norm.
Four, five, six, seven and in some cases eight-color printing presses were purchased by
printers all over the country. At the same time the sophisticated digital prepress equipment
required to reproduce these quality color pages was purchased by color trade shops and
certain printers and publishers. So the 1980's began an era of tremendous technological
change which continues today.
The fact of the matter is that the printing industry is evolving from a craft orientation
to a technology orientation at an alarming pace. In a little over 10 years, the industry has
gone from a completely photomechanical and electromechanical orientation to one where
digital technology touches all aspects of the process from design through printing through
binding finishing and distribution.
C. The Impact of Changing Prepress Technology
As rapidly as press technology is changing, innovation in the prepress area is
occurring even faster. A major reason for this is the expanding role that prepress is having
on information processing and dissemination and resulting new market opportunities that
encompass the broader worlds of publishing and communications.
The conversion from analog to digital data usage is an underlying cause of prepress
change. For decades photographic materials have been the analog prepress standard. They
have enabled users to merge discrete elements, from virtually any origin, into a final page
for platemaking. Generally speaking, digital products have not been able to provide this
standard environment to date.
However, with the development of industry standards and the evolution of products
that function within a common environment, digital standardization will occur between now
and the year 2000, and be adopted by the major prepress service suppliers. The adoption of
digital standardization is also a basic requirement for expanding the scope of the prepress
1222
market into Computer-Based-Publishing and communications market applications.
The transition to a digital environment will result in manual operations being
replaced. The transition to a digital standard will have a significant effect on the use of
certain types of traditional equipment and supplies. Ultimately the analog-to digital transition
will result in new hardware, software, supplies, and support needs.
Standardization will challenge product development. First, products will increasingly
become interchangeable. The transition will force vendors to focus on the development and
sale of discrete products that can be indiscriminately interchanged by the user. This situation
is similar to what has happened in the electronic office environment.
Compounding the product differentiation challenge is the issue of product life cycle.
As we have continued to see in the "plug and play" environment of the electronic office,
standards-based prepress products will also require more frequent revision and/or
replacement, thus the need to routinely upgrade to stay competitive.
D. The Beneflts of Advanced Technologies
For as long as printers have been putting ink to paper, the quest for greater output
and better quality with fewer man hours and reduced waste has been the driving force for
every press manufacturer. Today's new technologies have taken this quest to a new level.
Take for example one manufacturer's development of the continuous tubular blanket
sleeve which slides onto the blanket cylinder through the side frame of the press, thereby
reducing the plate cylinder gap to a mere 1/16 inch. The result is economic and
environmental benefits due to significant paper savings as a result of the elimination of the
blanket gap's non-print area. This and other increasingly rapid technological advances are
yielding faster production speeds, quicker makereadies, reduced running and makeready
waste, better flexibility and quality over a range of jobs, less downtime, and most
importantly - the ability to better compete with other communication vehicles.
E. The Challenge to Capital Investment in Printing and Publishing
Technologies
The NPES Quarterly Economic Forecast, prepared by NPES consulting economist,
Michael K. Evans, reviews the general economic outlook, printing and publishing equipment
ordered and supplies shipments. The forecast is derived from an econometric model
developed by Evans for NPES. Based on this model, new orders for printing equipment are
expected to rise 12% this year and 6% in 1994. Most of the growth probably occurred in
the first half of the year, when prospects for economic growth seemed brighter and many
expected the investment tax credit to be reinstated. Although interest rates will remain low,
this has little effect on capital spending during a period when capacity utilization rates are
low and many smaller firms are denied access to credit markets.
Shipments of imaging and prepress equipment systems, in essence computers and the
software needed to run them, are expected to rise about 10% this year and 8% in 1994.
While these are respectable gains, they lag far behind the 15% to 20% growth rates of the
1223
computer industry generally. The technological revolution is incompletely implemented in
the printing industry because of a lack of cash flow and ability to borrow, especially by
smaller printing companies.
Capital spending, after getting off to a sparkling start in the first quarter, abruptly
reversed course when the Clinton Administration announced it would not reinstate the
investment tax credit after all. Thus the combination of insufficient cash flow and weak
demand for customized printing will keep the growth in shipments of imaging and prepress
equipment at moderate rates, in spite of the continuing computer revolution.
Although the provision in the "Omnibus Budget Reconciliation Act of 1993"
increasing the expensing deduction for small businesses from $10,000 to $17,500 during the
year that the property is purchased is helpful, its incentive for investment will be severely
eroded by the extension of the depreciation period to ten years as called for in this proposal.
Clearly, Congress would be double-minded to adopt such a policy.
CONCLUSION
Rather than impeding investment, especially capital expenditures by small businesses,
Congress should be looking for ways to encourage capital formation and investment in new
technologies necessary for a revitalized industrial infrastructure. Mr. Chairman, we
respectfully urge you to adopt such a course, and thank you for the opportunity to present
these comments. I would be pleased to answer any questions or submit additional
information for the record.
1224
Mr, Payne, Thank you, Mr. Nuzzaco.
Mr, Hancock,
Mr, Hancock. Thank you, Mr. Chairman.
Question for Mr. Nuzzaco or Mr, Webber. We have two situations
here we are talking about. One is a change in the depreciation
schedule on printing equipment. Another one is the change in the
deduction for advertising. Which one of those two will impact you
the most?
One of them is likely to put you out of business. What will the
two of them do to you?
Mr. Webber. I wouldn't like either of them, but I am certain the
change in advertising would be extremely harmful to the printing
industry, too, which relies heavily on the advertising industry.
Mr. Hancock. Do you estimate in your own mind that requiring
advertising amortization would be even more serious to the print-
ing industry than the change in depreciation?
Mr. Webber. Yes, sir, it would be.
Mr. Hancock. Thank you very much.
Mr. Webber. But they both would be harmful.
Mr. Hancock. I don't know if you are aware of it or not, but a
few months ago — in fact, you might want to look it up — I think it
was in Reader's Digest, there was quite an article about who the
millionaires really are. It ended up saying that the millionaires are
people that most people don't know are millionaires; they are peo-
ple that work 60, 70, 80 hours a week; they are married; they are
roughly 55 years old, been married one time, and the majority of
them own printing plants. I thought it was interesting.
I am quite familiar with the printing industry. Let's face it, you
have to pump so much money back in for equipment in the printing
industry that if you can stay in it and compete, you will end up
with a pretty substantial investment in equipment.
Printing equipment, incidentally, is also one of our major ex-
ports. King Press down in my district recently shipped overseas
some web press equipment.
[The following was subsequently received:]
1225
INPCSI
The Association for Suppliers of
Printing and Publishiing Technologies
0(y Years of Service —1993
September 14, 1993
The Honorable Mel D. Hancock
U.S. House of Representatives
Washington, DC 20515
Dear Congressman Hancock:
I am writing to supplement formal testimony given by me on behalf of NPES The
Association for Suppliers of Printing and Publishing Technologies before the House Ways
and Means Subcommittee on Select Revenue Measures on September 8, 1993. I was a
member of panel number four that day, and spoke in opposition to the proposal to extend to
ten years the recovery period for certain assets used in printing and publishing. A copy of
my full statement is enclosed with this letter.
For the record I would like to respond to a question you posed to me and another
witness on the panel, Mr. Howard C. Webber, Chairman, Cohber Press, Rochester, N.Y.,
representing Printing Industries of America and the Graphic Arts Legislative Council.
Specifically, you asked whether in general printers would be more affected by the proposed
lengthening of the period for depreciating equipment used in printing and publishing, or by a
proposal to require that a portion of advertising expenses be capitalized and amortized over a
period of years rather than treated as a business deduction as under current law.
When asked to assess the relative affects of two detrimental proposals, Mr. Webber
candidly, and I think accurately from the point of viev/ of most printers, responded by saying
that the proposal to capitalize advertising expense would have a more detrimental affect on
printers' businesses than the lengthening of depreciation from seven to ten years on printing
equipment. Although I did not respond to your question during the hearing, I would like to
submit the following comments, with the request that they be inserted at the appropriate
place in the hearing record.
As you wiU note, both my testimony and Mr. Webber's is directed solely and
specifically to the proposal to extend to ten years the capital cost recovery period for assets
used in printing and publishing. As manufacturers and consumers of this equipment, we of
course have a particularly keen interest in this narrowly drawn proposal that directly targets
our businesses. At the same time, however, we also have a special concern about the
method by which advertising expenses are treated for tax calculations, due to the fact that
significant portions of many printers' incomes are derived from the printing of advertising.
While in aggregate terms the proposed change in the treatment of advertising expenses would
by comparison to lengthening depreciation have a significantly greater impact on the
economy as a whole, and most printers in particular, neither proposal is desirable by itself,
and if combined would be terribly detrimental to the economic interests of printers and their
suppliers.
To carry the analysis further, while each of the two proposals would have a negative
impact on printers and their suppliers, this impact would affect their businesses in different
ways. For example, requiring advertising expenses to be capitalized and amortized would
undoubtedly have a chilling effect on the total market for advertising, as the cost of such
activity becomes greater. In other words, the economic pie of advertising revenue would be
diminished as the activity becomes relatively more expensive. The statements of many other
witnesses in opposition to this proposal is testament to the wide spread negative effect of
such a proposal.
1226
On the other hand, the lengthening of depreciation has more to do with printing and
publishing's ability to compete for a slice of the advertising revenue pie. In a market that is
already challenging printers to stretch to remain technologically competitive, the additional
competitive disadvantage of lengthening depreciation would make it even more difficult for
printing and publishing to compete for a share of the market for information dissemination
vis-a-vis other modes of communication.
To complete my response to your question, let me carry the analysis one final step.
Any reduction in the printing and publishing industry's ability to upgrade its technology will
have a negative effect on the printing and publishing equipment supply industry, regardless
of the cause of that reduction. And to the extent that these suppliers' businesses decline, the
very existence of those at the margin may be jeopardized while many others are weakened,
resulting in the loss of good paying manufacturing jobs.
Moreover, another indirect consequence of such a decline which may not immediately
come to mind, but to which you alluded in your comments during the hearing, is the fact that
exports of printing and publishing equipment have been up during the domestic economic
slowdown we have been enduring. As you noted at the time of the hearing, King Press
Corporation, located in your congressional district in Missouri, is an excellent example of a
capital goods manufacturer that has excelled in exporting to the extent of being named
Missouri Exporter of the Year. For example, in recent times over 65 percent of its product
has been exported. Capital goods manufacturers will not be able to seize such opportunities
unless they are economically viable and ready to compete for this business. Policies that
foster such commercial readiness are in the economic best interest of the country and should
be encouraged, not impeded by government policy, especially policy such as the current
proposal to extend depreciation for assets used in printing and publishing, that singles out
specific industry to its detriment.
On behalf of NPES and myself, I appreciated the opportunity to testify before you and
the other members of the Subcommittee, and hope that this letter serves to further explain
our opposition to the lengthening of depreciation on assets used in printing and publishing, as
well as the proposal to capitalize advertising expenses.
I would be pleased to respond fiirther on these issues if necessary.
Mark J. Nuzzaco
Director of Government Affairs
Enclosure
Subcommittee on Select Revenue Measures
Committee on Ways and Means
U.S. House of Representatives
Ben Cooper
Regis J. Delmontagne
James C. Gould
A.J. HaU
J.M. Mike Murray
John M. Naimes
Howard C. Webber, Jr.
1227
Mr. Cohen and Mr. Feeney, how many jobs wall be affected by
this change in the advertising deduction in your judgment? I real-
ize we are not going to get any real actuarial or GAO accounting
or 0MB studies or anything like that.
Mr. Cohen. Well, it is very difficult to judge. The costs will go
up, the cost of advertising will go up. Therefore, budgets will go
down. So there will be less advertising, there will be less printing,
there will be less newspaper ads and so forth, and it should — I
mean, if logic follows, it should reduce sales because people adver-
tise to sell things, and if you have less information, there will be
less purchasers right there.
So it is going to have a dramatic effect, but it is way down the
pike. It takes a long time for that to feed through the system, but
it is deleterious to the system obviously.
Mr. Hancock. This idea of getting rid of deductions started way
back many years ago when all of a sudden the Government de-
cided, well, it can't raise rates past 50 percent, so therefore it is
going to start getting rid of deductions. Well, you can't fiilly deduct
the cost of meals and entertainment expenses.
I happen to be a small businessman. I know the benefit of taking
somebody out to lunch once in a while. In fact, I probably have
closed more contracts at luncheon meetings than any other time.
So they cut back on that deduction.
Now they are going to reduce it to 50 percent. Now they are talk-
ing about cutting back the advertising deduction. Here again, the
business lunch is a little bit of an advertising.
Now my question is, and here again in generalities, are we head-
ing toward a gross receipts tax rather than an income tax? You
know, just taxing gross sales? Is that where we are going?
Mr. Feeney. Hopefully not.
Mr. Hancock. Wouldn't it appear that this is the route we are
taking? You take advertising. You say, OK, you can't deduct 20
percent. Now 3 years from now we will say, well, you can't deduct
50 percent. If we keep doing this, there isn't going to be anybody
left to tax.
Mr. Cohen. The problem is really more the complications in ac-
counting. That is as you add one more job for the internal account-
ant in the company to take on, and his external accountant, the
CPA to take on, you add the costs there and of course you add —
when these proposals are suggested, nobody thinks about the fact
it is one more job for the revenue agent to do. That is, the revenue
agent now takes a look to see whether the advertising costs or
other costs are legitimate, but once he has done that, that is the
end of it. But there would be a new purpose now, he would have
to list those which are going to be subject to this amortization,
whatever that definition might be, and that is a problem, and then
he has to subject them to the amortization schedule, and then he
has to go back and audit last year's amortization schedule to see
that you are carrying forward the right numbers, so you have add
infinitely more complexity out of this one little change.
Every time you do it, as you indicated, Mr. Hancock, every time
you do it, you add that much more complexity on top of an already
existing complex system.
1228
Mr, Hancock. I am having trouble finding out or determining
just what is advertising. Has anybody really defined it? Are we
talking about radio and television? We talk about newspapers, we
talk about magazines. Are we talking about Yellow Pages advertis-
ing? Are we talking about handout pieces? Are we talking about a
PR employee, a guy who goes out to solicit business, not a sales-
man? Is that advertising? What is advertising?
Mr. Cohen. Your committee is going to have to define that. If
you were to adopt this rule, which all of us have opposed, if you
were to adopt it, you will have to adopt a definition of whether the
promotional man who goes out and calls on people, is he advertis-
ing? You know, are the people who prepare materials within the
company to supply information to the advertising agency, each of
those would require definition. And whoever is going to draft this,
you or your staff, are going to have to think those problems
through, because otherwise you are going to leave it to a regulation
writer. I used to be a regulation writer once in the Revenue Service
and I also used to be a regulation signer once in the Revenue Serv-
ice. Otherwise, you are going to leave those problems to those peo-
ple and they don't want to do that either. They would rather you
define them.
Mr. Hancock. What about amortizing election campaign adver-
tising. That makes good sense, doesn't it?
Mr. Cohen. We disallowed that many years ago, sir.
Mr. Hancock. Maybe we ought to look into that, Mr. Chairman,
as part of campaign reform. You have got to declare your contribu-
tions as income and then amortize the advertising. I don't know
who came up with this, but I know this, that they are completely
illogical. It absolutely does not make sense to do this to a business.
As a small businessman, and I don't spend money on advertising
just for the fun of it or just to see my name, because my company's
name is not my name. That is not the reason we advertise. We ad-
vertise to generate profit, therefore to expand, therefore to employ
more people. And advertising to me is the lifeblood of a lot of small
businesses, especially the business that has a new idea, something
that the public wnl buy if in fact they hear about it. Then we tell
them that they have to amortize advertising or that it is not a de-
ductible business expense. Even the legal profession is starting to
advertise now. They are finding out that it is a benefit to them.
Anyway, Mr. Chairman, I strongly recommend that this commit-
tee do whatever we have got to do to let the business community
advertise their products. If we don't advertise American products,
I will bet that the Japanese and the Germans and others are going
to advertise their products, and then what happens? There is noth-
ing we can do about that.
Thank you, Mr. Chairman.
Mr. Payne. Mr. Hoagland will inquire.
Mr. Hoagland. I have no questions.
Mr. Payne. Mr. Camp.
Mr. Camp. No questions.
Mr. Payne. I had just a question for Mr. Webber. Could you give
us a description of the kinds of equipment that are being consid-
ered in this proposed legislation and the cost of that equipment?
1229
Mr. Webber. Yes, Mr. Chairman. On the prepress area, you are
probably talking scanners and equipment that you can start buying
for $4,000, could probably go up to $150,000, $200,000. In the press
area, you are talking probably small presses starting at $6,000,
$7,000, $8,000, going up to your larger sheet-fed presses at $1.8
million, then into your web presses probably, what, $4 million or
on up.
In the bindery area, again you can start with small folders at
$5,000, $6,000, and go up to stitcher trimmers at $200,000,
$250,000, all the way up to $1 million. For example, a company
like ourselves, a $10 million company, our presses cost anywhere
in the realm of $40,000 up to $1.8 million. And we sit right now,
and I don't want to elaborate, but with a bank that based upon a
5-year pay back to the bank, and I don't know what we would do
if we went to 10 years. They won't even let us go to 7 years.
Mr. Payne. How long do these assets typically last in the print-
ing industry?
Mr. Webber. I think back in the 1970s and 1980s, they used to
last probably 10 years, and it was probably an active thing. Right
now, some of our prepress equipment we are buying, we are look-
ing at an 18-month to 3-year payback because by then it is going
to be obsolete, and in the printing press area we are probably look-
ing at 5 to 6 years we hope to replace our equipment, again be-
cause of obsolescence, not because it wears out, but because some-
thing new and better comes on the market.
Mr. Payne. With your scanner equipment?
Mr. Webber. Scanner equipment. For example, now the big scan-
ners that were bought for $200-, $250,000, are being replaced by
desk top scanners costing $45,000 that are no bigger than that. So
probably, I would say scanners probably 3 to 5 years max.
Mr. Payne. Thank you very much.
I would like to thank this panel for their testimony and for put-
ting this information into the record. It will be very useful for the
subcommittee and for the full committee.
Mr. Payne. Our next panel will testify concerning the increased
tariff on imported crude oil and the increased tariff on refined pe-
troleum products, and we will also have a witness testifying re-
garding a severance tax on hard rock mineral.
The first witness represents the Independent Refiners Coalition,
Robert H. Campbell, president and chief executive officer and
chairman of the Sun Co., Inc., Philadelphia, Pa.
Mr. Campbell, if you would proceed under the 5-minute rule.
Thank you.
STATEMENT OF ROBERT H. CAMPBELL, PRESIDENT, CHIEF
EXECUTIVE OFFICER AND CHAIRMAN, SUN CO., INC., ON BE-
HALF OF THE INDEPENDENT REFINERS COALITION
Mr. Campbell. Thank you, Mr. Chairman and members of the
committee. As you indicated, my name is Robert Campbell, and I
am chairman, president, and chief executive officer of the Sun Co.,
which as you probably know is a 107-year-old oil company that is
headquartered in Philadelphia. Philadelphia also happens to be the
home of the first-place Philadelphia Phillies, and the expected site,
beginning 4 weeks from today, of the National League baseball
1230
playoffs which will determine who gets to compete in this year's
World Series.
I am here today to address a world series of another kind. This
is a series involving our Nation's gasoline production industry,
thousands of American jobs, our commitment to the environment,
and our national security.
You know, when the Phillies take the field on October 7 they will
do so knowing that their opponents will face the same rules that
they do: The bases are going to be 90 feet apart for both teams and
the pitcher's mound is going to be 60 feet, 6 inches from home
plate, again for both teams. They are going to go into that game
confident that ability will determme the outcome. Today, I am here
seeking that same kind of competitive fairness for this country's
independent refiners.
My written testimony that accompanies these remarks spells out
the background information that I think you will find useful. It will
tell you that the Sun Co. is a member of the Independent Refiners
Coalition, and those are U.S. oil companies that have little or no
crude oil production. We simply purchase crude oil, refine it into
products, and supply the U.S. economy.
The written testimony will also tell you that 70 independent re-
fining companies operate 140 refineries in 34 States. We employ
200,000 people, and they produce nearly 40 percent of the gasoline
purchased in the United States today.
It will tell you that independent refiners have made and are con-
tinuing to make enormous expenditures to fulfill their environ-
mental obligations. Those expenditures fall into two categories. The
first is the investment in new processing equipment to produce the
new, cleaner burning fuels. The second is the investment in our re-
fineries, pipelines and terminals to eliminate air, water, and soil
contaminants.
The written testimony will tell you that foreign manufacturers
enjoy a significant advantage in the U.S. marketplace because they
are not required to meet the same standards that we do, nor incur
the investment that goes along with such conformance. The net ef-
fect of this is that we are systematically shutting down refining ca-
pacity in the United States and exporting the jobs overseas. This
makes absolutely no sense, regardless of whether you are a busi-
ness executive like myself concerned about the future of your com-
pany, a union leader concerned with job security or an environ-
mentalist who realizes that closing tne plant domestically only
transfers the pollution overseas which still fouls the worlds
ecosystems.
Incidentally, I might mention that we have the full support of
the president of our major union, the Oil, Chemical & Atomic
Workers International Union, in this proposal today.
I will also tell you that shutting down our refining industry in-
creases our dependence on a few foreign product manufacturers,
and that creates a national security issue of the first magnitude.
Our written testimony on behalf of the Independent Refiners Co-
alition will clearly urge you, as I do now, to enact an environ-
mental equalization fee on imported gasoline and blending compo-
nents. In doing this, you will restore some sense of reason to the
rule book and curtail the further erosion of an industry that has
1231
seen over 154 refineries shut down in the United States in the past
13 years.
I didn't come here today to complain about the bilHons our indus-
try has to invest to comply with the Clean Air Act and other stand-
ards. This industry has heard the environmental message. We have
made, are making, and will continue to make the necessary invest-
ments.
The company I work for, for example, is the first and onlv For-
tune 500 firm to endorse the CERES environmental principles. In
so doing, we have made a "no doubt about it" commitment to the
environmental improvement and increased public accountability. I
believe our environmental conscience and credentials are in order,
and I know that the air, water, and soil quality in this country are
improving, and that is something that we can all be proud of.
What we seek here today is to correct the consequences of a one-
sided contest where we make a major investment in the environ-
ment while competing with foreign manufacturers who get a free
ride in our markets. Their environmental laws are 5 to 20 years
behind ours, and it gives them anywhere from a 5 to 10 cents per
gallon advantage as a head start in the U.S. marketplace.
You should make no mistake about it: The U.S. refining industry
is a world-class industry. We have made the necessary investments
over the years to upgrade our plants and improve our productivity
so that we are second to none in our business. However, the new
environmental regulations have changed all of that. It just makes
no sense to now squander our hard-won leadership position.
What we have won in the international competitive marketplace
must not be lost by legislative inaction. Without an environmental
equalization import fee on gasoline, additional refineries will close
and additional jobs will be lost.
Why reward foreign manufacturers for their inattention to the
environment while penalizing U.S. firms that are investing billions
of dollars to improve air and water quality?
Gentlemen, by the decisiveness of your actions, steps and the
speed with which you take them, you can send a message of fair-
ness to the U.S. refiners and a message of reality to foreign manu-
facturers that the fi-ee lunch is over.
I thank you very much for your invitation to visit with you today.
[The prepared statement follows:]
1232
Testimony pr?g^nt^d
on Beh93,f Qf the
Independent Refiners Coalition
$ept^pi]?gr g. 199?
Mr. Chairman and Members of the Committee, my name is
Robert H. Ceunpbell, President, CEO & Chairman of Sun Company,
Inc. I am appearing today on behalf of the Independent
Refiners Coalition of which my company is a member. The
Independent Refiners Coalition is composed of twelve domestic
independent refining companies who operate 27 refineries which
have 15% of U.S. capacity. The members are Clark Oil &
Refining Corporation, Louisiana Land & Exploration, The
Coastal Corporation, Tosco Corporation, Crown Central
Petroleum Corporation, Valero Energy Corporation, Ashland Oil
Incorporated, United Refining Company, Tesoro, Kerr-McGee
Corporation, Indian Refining, and Sun.
Independent refiners process more than 38% of the
gasoline consumed in the United States and have been in
business for more than 65 years. In 1992 there were more than
70 independent refining companies operating 140 refineries in
34 states employing 200,000 people. Independent refiners are
defined as those who buy at least 70% of their crude oil
requirements on the open market and rely largely on their
refining and marketing operations to meet all of their capital
requirements in contrast to integrated oil companies which
have revenue streams from oil and gas production. In
addition, they are primarily domestic in operations and not
multinational .
One of the revenue raising proposals being considered in
this hearing is to increase the tariff on imported crude oil
and refined petroleum products. The Coalition has requested
the opportunity to be heard today to testify in favor of a tax
on imported gasoline and blending components. The Coalition's
support for such a tax is joined by other refiners, as well.
It is strongly felt by the Coalition and these refiners that
a tax is needed on imported gasoline and blending stocks to
offset the differential in the substantial embedded costs of
environmental compliance in this country compared with
relatively minimal environmental compliance costs faced by
foreign competitors. This differential is an unfair trade
advantage affecting our competitiveness and will cause a
continued loss of U.S. refining capacity. The result is a
threat to the national security of the United States, zmd the
global environment.
This problem of a significant difference in protection of
the environment between the United States emd other countries
creating an unfair trade advantage has been recognized by the
Administration and members of Congress. For example, when
the President was czuapaigning last year and announced his
support for the North American Free Trade Agreement (NAFTA) ,
he did so on the condition that the environment had to be
protected on both sides of the border or it would lower
Mexican cost of production which would be unfair to American
1233
workers.^ Vice President Al Gore vnrote in his book, Earth In
The Balance, that "...weeOc and ineffectual enforcement of
pollution control measures should also be included in the
definition of unfair trading practices."^ U.S. Trade
Representative Mickey Kantor has testified on several
occasions before the Congress on NAFTA pointing out that there
would be a trade advantage in Mexico's favor if it failed to
enforce environmental laws^. He also stated, "I think we'll
recognize that if a difference is maintained, that will
probeibly give a competitive advantage to a firm operating, say
in Mexico, compared to that same firm operating in the United
States."*
The Majority Leader of the U.S. House of Representatives,
Congressman Richard Gephardt, has spoken of the need of other
countries to have environmental laws and enforcement of them
as a competitiveness issue'; as has Senator Max Baucus,
Chairman of the Senate Environment and Public Works
Committee." In addition. Senator David Boren has introduced
legislation in the past on the subject.' One scholar has
written that even according to present law, the lack of
environmental controls or the failure to enforce them should
be considered a subsidy subject to a countervailing duty.'
Therefore, representatives of the Executive and Legislative
branches of our government have recognized that the lack of
environmental protection laws and regulations or enforcement
of them is a competitiveness problem for American industries.
This has been recognized by environmentalists as well.'
^Governor Bill Clinton speaking of the North American
Free Trade Agreement at a presidential campaign rally at North
Carolina State University, Raleigh, North Carolina, on October
4, 1992.
^Senator Al Gore, Earth In The Balance. (Houghton Mifflin
Co.: Boston 1992) p. 343.
'Testimony of U.S. Trade Representative Mickey Kantor
before the Senate Finjmce Committee, May 20, 1993.
*Testimony of U.S. Trade Representative Mickey Kantor
before the Senate Environment and Public Works Committee on
March 16, 1993.
'bnA Dailv Report for Executives. May 12, 1993.
^Hearing of the Senate Environment and Public Works
Committee, March 15, 1993.
'international Pollution Deterrence Act of 1991, S.984.
"Thomas K. Plofchem, Jr., "Recognizing and Countervailing
Environmental Subsidies", The International Lawver. Volume 26,
Number 3 (Fall 1992), p. 763.
"Testimony of Robert F. Housman, Center for International
Environmental Law, before the Subcommittee of Foreign Commerce
and Tourism, Committee on Commerce, Science and
Transportation, U.S. Senate, May 18, 1993.
1234
The cost to domestic refining for pollution etbatement is
substantial and is higher than for most industries.^" Based
on older figures, it has been calculated that petroleum
refining could account for a disproportionate 17% of the
national environmental expenditure in the year 2000.^^ The
domestic petroleum refining industry will, according to a very
recent study done for the Secretary of Energy, invest $37
billion from 1991 through the year 2000 and $14 billion more
from 2001 to 2010 to comply with government environmental
regulations.^ The sums spent this decade will actually
exceed the total 1990 book value of all domestic refineries
(after depreciation) which is only $31 billion." Refineries
spent 21% of their capital in the 1980 's on pollution
zQ^atement, which will increase to 42% in the 1990 's and 47% in
the first decade of the next century.^* The significance of
this massive cost is that the cash flow of all of these
refineries from 1991 through 1995 will be $25 billion less
than the required environmental expenditures.^' These new
costs of environmental compliance will increase the cost of
gasoline by approximately 5C a gallon in 1994 and will rise to
approximately 13C a gallon by the year 2000,*' on top of the
historical pollution zQjatement costs for 1981 - 1991 of 20 a
gallon."
The recent National Petroleum Council (NPC) study is the
only one of which we are aware that attempts to look at
foreign refining environmental protection requirements. While
we think this study in general has been very helpful, a great
deal more work needs to be done in actually determining
specific information on foreign environmental protection.
There is, in our opinion, too much speculation as to what
environmental standards will be applied when and where as well
as whether or not they will be enforced. One review of the
study has noted that unlike the detailed analysis of U.S.
costs, the estimate of foreign costs "...is more arbitrary and
assumption-based and thus subject to greater uncertainty."*'
The NPC study is aware of this shortcoming and has termed
foreign cost estimates as subject to "significant
Office of Technology Assessment, Congress of the United
States, report "Trade and Environment", 1992. p. 98.
**American Petroleum Institute report, "Costs to the
Petroleum Industry of Major New and Future Federal Government
Environmental Requirements", October 1991, p. 21.
"National Petroleum Council, U.S. Petroleum Refining .
August 2, 1993 Draft, p. 1. I-l.
"Uiifl.
"ibid., p. 1. 1-2.
"ibid. . p. 1. I-l.
"ibid. . raw data used for conclusions in Chapter 1.
"Oept. of Commerce report MA-200.
**Wright Killen & Co. report, "A Broader Look at U.S.
Refining Industry SurvivaJsility and International
Competitiveness," June 8, 1993, p. 2.
1235
uncertainty"." Foreign environment, safety and health costs
present and projected need to be studied in much more detail
and, due to the coi^>etitiveness problem, a study needs to be
done as soon as possible.
Even with these caveats, the NPC study has concluded
that, "...most foreign areas lag the United States in health,
safety, and environmental regulations and, consequently, have
lower embedded environmental costs them the United States.""
For example, the U.S. presently spends 1.7% of its GDP on
environmental programs while the European Community's average
is only 1.2% or a third less." The report goes on to note
that although many countries have adopted some environmental
regulations, it is "...far less common for these regulations
to be enforced"." It is further observed that oil producing
and lesser developed countries "...view government interests
in refining as vital to national economic health - a belief
that can supersede environmental agendas."^'
The NPC report concludes that, "Overall, foreign regions
today are estimated to be where the U.S. was roughly 5-20
years ago in terms of environmental regulations." Thus, by
the best information available, most competing refining areas
of the world are amy where from 5-20 years behind us and may
or may not adopt similar environmental protection as required
of our refiners. If they are adopted, they may not be
enforced.
Even with the best case of a five year lag time for
foreign refiners to "catch up" with U.S. environmental
standards and enforcement, the damage to domestic refiners
will have been done, and in all probability, will be
irreversible. Over the critical next five years, imported
gasoline will be readily availeUsle to replace reduced domestic
production which will prevent U.S. market prices from rising
to allow full cost recovery of increased environment, safety,
and health costs." Once a refinery closes for these
reasons, it will not likely restart."
The NPC report concludes that if foreic^n environmental
protections do not materialize, the cost of foreign produced
gasoline would be less than the United States.*' This would
'"npc Draft report, Executive Summary, p. 37.
"ibifl.. Executive Summary, p. 11.
*'eop Group, Inc. , "The United States versus European
Community", August 13, 1993, p. 3.
"ibid. . Appendix L, Section VII-9, p. 5.
"ibid., p. 14.
**Ibid. . Appendix L, Section VII-10, p. 1.
**Wright Killen & Co., June 8, 1993 report, p. 3.
"Ibid.
"npC Draft report. Executive Summary, p. 11.
1236
result In increased Imports of gasoline and reduced U.S.
refinery utilization."
Today management teeuns at domestic refining headquarters
aroxind the U.S. face a most difficult quandary: Whether to
commit the capital investments necessary for pollution
eibatement to continue operations ]cnowing that lower cost
imported product will make it unlikely to be profiteible or not
to invest. To no invest means to close the refinery.
A very important fact here that must be acknowledged is
that although the NPC report concludes there is a similarity
in the projected foreign refinery investments for the rest of
this decade to American refining cost increases, those in the
United States are largely attributed to the environmental
requirements while foreign increases included a more
significant capacity expansion." Increased costs for
environmental protection neither builds additional capacity to
produce gasoline nor does it improve efficiency of existing
capacity and while it is good for the ecology, it is
nonproductive in terms of production of additional gasoline or
producing it cheaper.^" Rather, these costs add another
layer of costs to products offered in competitive markets. ^^
The report concludes that recovery of these costs are going to
be difficult unless dememd is increased by further refinery
capacity shutdowns."
Increasing refinery shutdowns is precisely what has been
happening in the refining industry. In the 1980' s, the number
of domestic refineries dropped from a high of 315 to 184. 131
refineries closed for a 42% decrease in the number of
refineries and the refining capacity fell from 18.62 million
barrels per day to 15.7 or by 20%. During that seune time
period, imports of foreign refined gasoline more than doubled
from 140,000 barrels a day to 366,000."
The shutdown of American refineries is continuing.
Wright Killen & Co. conducted a plant -by-plant analysis of all
refining operations in the U.S. in 1992. Their report
predicted that 37 additional U.S. refineries with 1.5 million
barrels a day of capacity or another 10% of the total capacity
"Ibid.
"ibid. . Executive Summary, p. 39.
^°Ibid. . p. 1. II-2.
"ibid.
"Ibifl.
"ibid., Executive Summary, p. 17; Office of Industrial
Resource Administration, U.S. Department of Commerce, The
Effect of Crude Oil and Refined Petroleum Product imports on
the National Security, zmd Investigation conducted under
Section 232 of the Trade Expansion Act of 1962, Table III - 3
(Dec. 1, 1988).
"ibid. . Table III-l.
1237
is at risk in closing in the next 3-5 years.'* They have
found that in the year since the 1992 study, almost a third of
the predicted capacity closure, 498,000 barrels per day, has
in fact closed. At least one more refinery has closed since
that June 8, 1993 update with a loss of another 50,000 barrels
per day capacity.' That report is corroborated by the NPC
study which predicts that there is going to be a substantial
restructuring in the coming years characterized by shutdowns
of refining capacity.'* Indeed, the NPC study concluded that
shutdowns accelerated in 1992 to the third highest level in
history.'* A third recent analysis reporting that dropping
refining capacity " — is likely to continue due to the cost of
complying with environmental regulations, particularly
amendments to the Clean Air Act, and also due to narrow profit
margins for most refining operations."*" That USEA report
predicts increased petroleum product imports as a result
accompanied by dropping U.S. employment.**
Therefore, we have seen a 20% decline in refining
capacity already zmd we are well on our way to a predicted
additional 10% for a total of a 30% loss of domestic refining
capacity in just over a decade. While additional imports will
likely occur to offset the reduced domestic production, one
should not focus on the euaount of imports as the sole
determinant of the problem. Refining and marketing price
margins are just as important if not more so.
The way the gasoline marketing operates in the United
States is that the marginal barrel of gasoline coming into a
market sets the price. The price is set at the margin. Those
last barrels of gasoline coming into the market are imported
because we are not producing all that we consume. Because
they have less embedded costs for environmental protection of
at least 70 a gallon, they can sell their gasoline in our
markets for less than that domestically produced even taking
into consideration the difference in transportation costs of
finished products and that of crude oil. Their marginal
barrel coming in sets the price for all of the domestic
gasoline. If domestic gasoline refiners don't lower their
prices to meet imports, then more imported gasoline will come
in further displacing domestic production which will then have
no market since it costs more at the pump.
Today the margin of profit on a gallon of domestic
produced gasoline is a penny a gallon or less. Thus, the 50
"Wright Killen & Co. report, "Btu Energy Tax Study", May
1993, p. 2.
'^Wright Killen & Co. study, June 8, 1993, p. 1.
"Marathon Oil Company refinery in Indianapolis, Indiana,
The American Oil & Gas Reporter. August 1993, p. 14.
'*NPC Draft report, p. 1. VI-1.
'"Ibid.
*'*United States Energy Association, "U.S. Energy '93", May
1993, p. 3.
**iiLL<a.
1238
a gallon differential now enjoyed by imported gasoline which
will continue to increase is a significant factor depressing
costs at the pump. If a domestic refiner cannot get back the
capital it is going to have to invest in the future for
environmental protection, it will not make that investment and
will shut down the refinery. This is exactly the point made
in the NPC study in comparing the total pollution costs of $37
billion over the rest of this decade substantially exceeding
the cash flow of the refineries.
Unless there is some tremendous increase in demand for
gasoline, which is not predicted by anyone, it is not possible
for the rate of return to justify these expenses. Therefore,
the real problem is not so much whether the present levels of
imported gasoline are going to go up or down, but rather what
is the marginal rate of return to the domestic refiner. As
long as it is depressed as it currently is, more refineries
will shut down rather than invest further. If the embedded
cost differential disappeared, however, the margin would
increase and refineries should remain on streeun. The
environmental playing field needs to be leveled.
There are several results to a continued shut down of
domestic refineries. The first is the economic consequences
to the United States. The additional 10% reduction in
refining capacity, according to the conservative scenario of
a recent economic analysis, would increase inflation .7 of a
percent.*^ It would also affect interest rates by raising the
short and long term rates by 40 basis points. The report
calculates that the dollar would rise as interest rates went
up which in turn would inhibit the competitiveness of U.S.
produced goods in international markets.^* The decline in
refining capacity would also affect U.S. employment by a
decline of nearly 200,000 jobs.*' Lastly, the Gross Domestic
Product would see a decline of .3 of a percent in 1994 and
1995.**
A second result of this decline in domestic refining
capacity is the effect on the national security of the United
States. A recent report noted that five different Presidents
- Eisenhower, Kennedy, Nixon, Ford and Carter - imposed
restrictions on imports of refined petroleum products because
they recognized that maintaining domestic refining capacity
was essential to national security.*' The report analyzes
military needs in several scenarios and then compares those
needs to our domestic refining capacity. There is a gap today
between what we produce and consume of 1.8 million barrels a
*^he WEFA Group, "Macro Economic Impact of a Ten Percent
Reduction in U.S. Refining Capacity," May 25, 1993, p. 3.
*^Ibid. . p. 5.
**Ibid. . p. 7.
*'lbid. , p. 8.
*''lbid.
*'The National Defense Council Foundation, "Refineries in
Crisis: The Threat to National Security," July 23, 1993, p.
3.
1239
day which will grow in 1995 to 3.25 million barrels a day and
by the year 2000 to 6.9 million barrels a day.** With a
military conflict arising, the gap would obviously increase
due to the needs of the military and military industrial
complex, widening the gap to 4.9 million barrels a day in 1995
and a 8.6 in the year 2000.*' "Even if draconian
conservation and rationing measures were employed during a
conflict and succeeded in achieving a reduction in civilian
demand of as much as 20%, a severe shortage would still
develop."'" Therefore, the report concludes, "There can be
no doubt in light of the enormous and growing gap between
domestic refining capacity and domestic demand, that the tests
set forth in the Ford Administration's standard for
determining the point at which refined petroleum product
import levels could constitute a national security threat has
been met.""
The economic impact and the threat to our national
security are both to be avoided if at all possible. As has
been concluded by the United States Energy Association, "The
decline in our domestic ...refining capacity cannot
conceiveibly be in our national interest.""
In our opinion, it is possible to avoid. Congress must
take action to prevent further decline in our industry, damage
to our economy, zuid a worsening of the threat to our national
security. We propose that Congress pass a tax on imported
gasoline approximately equalling the embedded costs
differential of environmental costs starting at 70 per gallon
on January 1, 1994 and increasing IC per year thereafter until
it reaches 130 per gallon on January 1, 2000. In our opinion,
this tax will eliminate the differential environmental cost
subsidy enjoyed by foreign refiners that will in turn cause an
increase in the domestic refiners margins which will improve
their profiteJaility preventing further shut downs. This tax
offers several advantages:
1. The tax would eliminate the unfair competitive
advantage held by foreign refiners.
2. It would remove a further increase in the threat to
national security of reduced refining capacity.
3. It would encourage domestic refiners to expend the
money necessary for future environmental protection
by giving them an opportunity to recover their
costs .
4. It would eliminate the incentive for foreign
refiners to resist imposition of environmental
*'lbid.. p. 9'.
*"'lbid.
"ibid.
'^Ibid.
'United States Energy Association, "Energy '93 Report"
10.
1240
standards or their enforcement as they would no
longer have a cost advantage.
5. It would provide additional needed revenues to the
U.S. Treasury."
Either Congress through legislation or the President
under existing legislation could impose a tax on imported
gasoline on the grounds of national security. Section 232 of
the Trade Expansion Act of 1962 expressly authorizes the
President to adjust imports by quotas or import fees which
threaten to impair the national security.'* This legislation
is broad and does not define what constitutes a threat to
national security as it is left to the President's
judgment." Six recent Presidents have already used this
authority to regulate imports of petroleum and petroleum
products. President Eisenhower used a quota". President
Nixon imposed license fees'', and President Ford increased
the import fees".
The Congress can also legislatively find a threat to
national security and impose a tax on imported gasoline. The
fact that Congress granted to the President powers under § 232
of the Trade Expansion Act of 1962 was not an abdication of
its constitutional responsibilities. Rather, it is a grant of
concurrent power to the Executive Branch which gives the
President the limited power to make national security findings
under Congressionally prescribed circumstances, while Congress
also retains its power to make a national security finding.'*
A tax on imported gasoline passed by the Congress is also
consistent with U.S. international obligations. It does not
violate the General Agreement of Tariffs and Trade. Article
XXI of GATT provides a specific exception to a contracting
party imposing trade restrictions for reasons of national
security. That Article reads in part: "Nothing in [GATT]
shall be construed ...to prevent any contracting party from
taking any action which it considers necessary for the
protection of its essential security interests..." This
Article makes no requirement eO^out the manner in which a
contracting party determines when it does have a national
security interest sufficient to trigger this exception. GATT
practice has been to defer to the decision of the contracting
'National Defense Council Foundation Report, p. 11.
'*19 U.S.C. S 1862 (C)(1)(A).
"ln<agpen<?gnt gaspling MarK^terg cpyingjl v, Pungan, 492
F.Supp.614(D.C.D.C. 1980).
'^Proclamation No. 3279, March 10, 1959, 24 Fed. Reg.
1,781.
"Proclamation No. 4210, April 18, 1973, 38 Fed. Reg.
9,645.
'•proclamation No. 4341, January 23, 1975, 40 Fed. Reg.
3,965.
"consumers Union of U.S.. Inc. v. Kissinger. 506 F.2d 136
(D.C.D.C. 1974).
1241
party when they invoke the national security exception." It
should also be noted that not all countries that export
gasoline to the United States are contracting parties to GATT.
Such a tax would also be an important environmental
policy. If American businesses are expected to make
significant investments to protect the environment, they must
be reasonably secure in believing they are going to be ahle to
get their money back from the operation of their business and
not be rendered less competitive. This tax would show
American refiners that our government is not going to let them
lose competitiveness and that they have a chance in the
marketplace to get their investment returned. By the same
token, it will be a clear message to countries around the
world that have not implemented environmental protections or
are not enforcing them, that there will be no profit or trade
advantage in their failing to do so. The domestic and
international environment will be improved as a result.
A final result of this tax is that it will raise revenue.
Even with exempting Canada with whom we have a free trade
agreement, the tax beginning at 7C on January 1, 1994 and
increasing IC per year until it reaches 13C per year on
January 1, 2000 will raise approximately $1.9 billion over the
next five years.'* Although it will raise a substantial sum
of money, it will not reflect a corresponding increase at the
pump. One report has estimated that the average U.S. gasoline
pump prices would not increase by more than IC per gallon and
in some cases less than 1/4C per gallon as a result of the
passage of this t«uc."
Therefore, Mr. Chairman and members of the Committee the
Coalition urgently requests that you pass a tax on imported
gasoline and blending components in a miscellaneous revenues
bill which might result from these hearings starting at 7C per
gallon on Jemuary 1, 1994 and increasing by IC per gallon a
year until it reaches 13C per gallon on January 1, 2000 as
necessary to protect the national security of the United
States, help our domestic economy, protect the domestic and
international environment, and give relief to the domestic
refining industry from foreign unfair competition.
^"Handbook of GATT Disputes Settlement. Pierre Pescatore,
Transitional Juris Publications, 1992, Part 1: Introduction,
p. 58; GATT Activities 1986, pp. 58-59; GATT Activities 1987,
pp. 69-70; John H. Jackson World Trade and the Law of the
GATT f 1969 ) . p. 749; GATT Activities in 1982, p. 72; GATT
Activities 1985, p. 47.
'^Energy Information Administration, Petroleum Supply
Monthly for Imports January - December, 1992 of Finished Motor
Gasoline and Motor Gasoline Blending Components Totalled
121,668,000 barrels; divided by 42 gallons to the barrel
equals 5,110,056,000 gallons multiplied times 7« and then an
additional cent for each year through IIC in the fifth year
equal $2,299,525,200 less imports from Canada that year which
were 17% of the total; equal $1.9 billion.
^^right Killen & Co., "The Effects of National Security
Fee on U.S. Gasoline Prices", June 14, 1993, p. 1.
1242
Mr. Payne. Thank you, Mr. Campbell.
Our next witness, representing the Independent Petroleum Asso-
ciation of America, Virginia Lazenby, chairman and chief executive
officer of the Bretagne Corp., Nashville, Tenn.
Ms. Lazenby.
STATEMENT OF VIRGINIA LAZENBY, VICE CHAIR, CRUDE OIL
POLICY COMMITTEE, INDEPENDENT PETROLEUM ASSOCIA-
TION OF AMERICA, AND CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, BRETAGNE CORP.
Ms. Lazenby. Good afternoon. I am here today on behalf of the
Independent Petroleum Association of America, its 44 cooperating
State and regional associations, and the National Stripper-Well As-
sociation where I serve as president. These organizations whole-
heartedly support an oil import fee as part of a comprehensive plan
to preserve domestic oil production.
Yesterday oil closed at $17.07 a barrel, down 66 cents, the lowest
in 3 years. Most U.S. producers are receiving just $14 to $15 a bar-
rel. Marginal production, 20 percent of our U.S. production, 2 mil-
lion barrels a day, is operating at a significant loss — ^yes, loss, we
are losing money.
We are being destroyed by cheap oil, which does not pay environ-
mental costs. And our Government's response is to finance more
cheap imported oil, which results in more destruction of the inde-
pendent oil producers and their employees. On a personal note, just
before I came over here today, I called Kentucky and I shut in a
water flood a well that has been producing since the 1950s.
Mr. Chairman, there has been a rash of stories in the press late-
ly about the U.S. Government's financial assistance to encourage
oil production. Let me read from the September 3, New York Times
entitled "Texaco Gets Aid to Invest in Russia."
The article explains, 'The oil company has a project to restore
production of 150 dormant wells in Western Siberia. The Overseas
Private Investment Corp. — ^yes, a Federal agency — will provide $28
million of loan guarantees and insurance against political risk for
the effort. The agency is prepared to provide up to $2.5 billion in
new loans, loan guarantees, equity and insurance in the next year
to support private investment in Russia."
I come here representing U.S. independent producers to ask your
assistance to develop U.S. resources. It is not just the big multi-
national oil companies operating in Russia that need help from the
U.S. Government. U.S. producers need capital, too, and rather than
the $2.5 billion, 1-year program in Russia, we are asking for a $1.5
billion program spread over 5 years.
Keep in mind we may need this even more. Since we are told by
the Grovernment that the aim of producing Russian oil is to sell it
on the world market, which will keep oil prices low and which, I
might add, will put more U.S. independents out of business and in-
crease the trade deficit by something like $7 billion and put
100,000 marginal producers out of business.
The experts say oil prices fell yesterday because demand is down
in Russia. Just wait until the Russian production which our Gov-
ernment is subsidizing comes on line. How low will the price go
then? When do we begin to think about American jobs?
1243
An oil import fee is justified to create a price difference that bet-
ter enables U.S. producers to compete, to offset their higher operat-
ing costs that result to a large degree from Government-mandated
costs principally for environmental protection. You can bet that the
U.S. subsidies for Russian oil development do not come with the
same high-cost environmental requirements that U.S. producers
must meet.
Three months ago I appeared before this subcommittee to discuss
the increasing loss of marginal oil well production in the United
States. I pointed out then that U.S. oil production had hit its low-
est level since 1960.
Our trade deficit is dominated by oil imports; last year it was
$45 billion. For the first time since June, the United States has
consistently imported more oil than we produce. Thousands of bar-
rels of marginal oil production have been shut in forever. U.S. com-
panies have gone out of business.
According to Energy Secretary Hazel O'Leary, "This is not a po-
litical issue. Everyone agrees there is a problem. The question is
how to solve it."
Even now, her department is finalizing a domestic energy initia-
tive for the President. As part of that initiative, domestic oil and
gas producers have advocated tax policy changes that will stimu-
late domestic oil and natural gas production. These are discussed
in detail in our written statement.
Today I want to emphasize that these tax changes can be funded
by a small increase in the current fee on imported oil and petro-
leum products.
Mr. Chairman, it costs more to produce oil here than anywhere
else. A big part of these costs are for environmental protection and
workplace safety. We pay for it, but U.S. oil production is safer and
more environmentally sensitive than anywhere in the world.
In all the world, the U.S.'s 463,000 U.S. marginal wells are the
most economically vulnerable, the most likely to oe shut in if world
oil prices stay at their currently depressed prices or fall even lower,
a very real prospect.
If the United States adopts an energy policy that says simply
"Back oil out of the market and substitute other fuels" like domes-
tically produced natural gas, without some measure to preserve
those marginal wells — it will be oil from U.S. stripper wells that
will be backed out of the market, not imported oil. It will be pro-
ducers in New York, Kansas, Michigan, Oklahoma and a dozen
other States that will be forced out of business, not the sheiks and
princes of OPEC countries.
A slight import fee to pay for a production credit with a floor
price, which I understand the Clinton administration is considering
as part of its domestic initiative, will give our country a much bet-
ter energy policy, a policy that preserves domestic production and
creates a level of price stability that will encourage investment.
Thank you, Chairman Payne. That concludes my testimony.
[The prepared statement and attachment follow:]
1244
Independent Petroleum {^UilJ s Association of America
Statement by
Virginia Lazenby
on behalf of the
Independent Petroleum Association of America
before the
Committee on Ways and Means
Subcommittee on Select Revenue Measures
United States House of Representatives
September 8, 1993
MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE:
I am Virginia Lazenby. I am from Memphis, Tennessee and Chairman of
Bretagne Corporation, an oil production company with marginal wells operating
principally in Kentucky. I appear today on behalf of the Independent Petroleum
Association of America, where I serve as the Vice Chair of the Crude Oil Policy
Committee. I also am the president of the National Stripper Well Association.
I am pleased to provide views in support of an increase in fees on imported oil
and refined petroleum products. I also want to address the need for changes in tax
policy affecting domestic natural gas and oil production and to restate our concerns
about other tax proposals that have been introduced in the House of Representatives.
BACKGROUND. It has gone unnoticed, but our nation had an anniversary this year.
Twenty years ago this year, the Arab oil embargo brought America's energy
vulnerability into stark focus for anyone who waited in a gasoline line. The 1973
embargo, and the oil price rise that followed it and the 1979 Iranian Revolution,
spawned initiatives to improve U.S. energy security through various programs focused
on conservation, production of synthetic fuels, fuel use mandates, and alternative
fuels, but with little to stimulate domestic oil production. In fact, passage of the
Windfall Profits Tax drained more than $78 billion dollars out of the domestic oil
industry, when it should have been investing those resources into new domestic natural
gas and oil reserves.
Representing America's Domestic Petroleum Explorer/Producers
For information call (202) 857-4722
1245
What were the results of those everything-but-produce energy policy changes?
Perhaps, that was best summed up by the Office of Technology Assessment (OTA) in
October, 1991, which concluded that the United States was more vulnerable than ever
to an oil import disruption.'
The OTA's conclusion was supported in principle by an earlier Department of
Commerce investigation into the impact of oil import dependence on national security.
On December 1, 1987 a coalition of associations, companies, and individuals
petitioned^ the Department of Commerce to investigate the impact of crude oil and
petroleum imports on national security, asserting that imports had weakened the
domestic petroleum industry to such an extent it that would not be able to support
U.S. security needs in the event of war.
After an extensive investigation and public comment, the Department found that
"petroleum imports threaten to impair the national security." The Department of
Commerce noted that there had been substantial improvements in U.S. energy security
since its 1979 investigation, but pointed out that declining domestic oil production,
rising oil imports, and growing Free World dependence on potentially insecure
sources of supply raised a number of concerns, including vulnerability to a major
supply disruption. Regrettably, the report did not result in direct action by either the
executive or legislative branches of the Federal government to decrease oil import
vulnerability.
A substantial portion of Congressional energy policy action in the late 1980s
and early 1990s was focused on repealing or greatly modifying the command and
control provisions of various energy laws, even though the level of the nation's oil
import dependence had begun to climb once again. It appears that the strength of
political will needed to deal with our nation's dependence on imported oil had waned
with the collapse oil prices in 1986. Outside of oil-producing states, cheap oil was not
considered a problem. However, in the oil-producing states the results of cheap oil
imports were devastating, with more than 465,000 jobs lost in less than a decade.
The Bush Administration launched its National Energy Strategy (NES) in 1989,
which resulted in the Energy Policy Act of 1992. At the outset, the NES sought to
decrease the nation's oil import vulnerability by opening previously restricted Federal
lands to oil exploration and production, providing additional incentives for the use
natural gas and alternative fuels, streamlining nuclear plant licensing, and encouraging
greater conservation and energy efficiency. Not surprisingly, all elements of the
proposed NES became law, except those proposals to open Federal lands for
exploration and development; indeed, the Energy Policy Act of 1992 placed additional
restrictions on offshore development and, as a result of a filibuster, was silent on the
opening of a small portion of the Arctic National Wildlife Refuge to development.
77-130 0 -94 -8
1246
The U.S. Congress added a tax title to Energy Policy Act of 1992, that
substantially removed the 'tax penalty' on domestic drilling and production imposed
by the alternative minimum tax (AMT). While these AMT changes brought the
effective tax rates of oil and natural gas producers closer to the level of those of other
businesses, it did not provide new incentives for production and drilling. The last
significant statutory tax incentive for domestic exploration and production, the Non-
conventional Fuels Tax Credit, expired at the end of 1992. The "Section 29 credit"
led to the development of extensive natural gas resources that probably would not have
been developed at that time without the credit.
DOMESTIC ENERGY INITIATIVE.
In February of this year. Energy Secretary Hazel O'Leary announced a
"Domestic Energy Initiative" that would seek to decrease the nation's oil import
dependence, increase domestic oil and natural gas production, and reconcile energy
and environmental goals. This month, the Department of Energy is expected to
submit its energy policy recommendations to President Clinton. The IPAA and
numerous other domestic energy groups have advocated an oil import fee as part of a
comprehensive program to revitalize the domestic oil and natural gas industry.
OIL IMPORT FEE. The United States currently collects approximately
$250,000,000 per year through fees on imported oil and refined petroleum products,
as follows:
Item Tariff Rate
(per barren
Crude OU
less than 2S gravity
$0.0525
more than 25 gravity
$0,105
GasoUne
$0,525
Jet Fuel
$0,525
Residual Fuel OU
$0.0525
No. 2 Fuel Oil
$0,105
IPAA SUPPORTS AN OIL IMPORT FEE. As the recent debate over the BTU tax
demonstrated, any energy tax increase will be controversial and raises issues ranging
from interfiiel competition to disparate economic impacts among regions of the
country, and consumer costs. However, unlike the BTU tax and most other
alternatives, only an oil import fee gets to the core issue of this nation's enerev policy
- the vulnerability created by the nation's excessive dependence on imported oil and
petroleum. Only an oil import fee will help the domestic industry survive its nearly
seven-year long depression and, in the process, create jobs.
1247
EMPLOYMENT. As we have told this Committee on several occasions in the last
two yean, the U.S. oil and gas extraction industry has lost more than 450,000 jobs
since its peak employment in 1982, more jobs than were lost in the automobile,
textile, steel, and electronics industries. In the first quarter of this year, employment
fell another seven percent from the same period last year. The domestic oil and
natural gas industry has lost more jobs than it has retained over the last decade.
RIG COUNT. The rig count, the basic barometer of the industry's economic health,
fell in June, 1992 to 596. the lowest level ever recorded and the sixth all-time low set
in 1992, which had the lowest annual rig count ever.' Rig count for 1993, although
improved since last year, is still at less than half the average level over the last twenty
years.
TRADE DEFICIT. Consumption of natural gas and crude oil in the United States,
by all official estimates, will continue to rise well into the future. If current trends
continue, the U.S. could be importing 17 million barrels of petroleum each day by the
year 2010. The climb in oil imports is readily evident. In 1991, crude oil and
petroleum product imports accounted for more than 50% the nation's trade deficit.
Low prices kept the value of oil imports below that level in 1992, but oil imports
were 46 percent of the trade deficit and remain, as in years passed, the largest single
component of the trade deficit. This year, as indicated earlier, more than 50 percent
of the crude oil and petroleum products consumed in America is coming fi-om foreign
suppliers.
NATIONAL SECURITY. The IPAA was so concerned about this trend that we
wrote President Clinton in January, and again in June, urging him to investigate the
situation and to take action by imposing an oil import fee under the authority granted
him under the Trade Expansion Act. We have not heard what the Clinton
Administration plans to do on our request. We are willing to examine the upcoming
Domestic Energy Initiative to see it makes substantial recommendations to improve
domestic oil production. If not, the IPAA, other industry associations, and individual
companies may file a petition under the Trade Expansion Act. We believe the issue
of oil import dependence must be addressed directly.
Domestic natural gas and oil reserves are a national security and economic
resource. Every barrel of oil and every cubic foot of natural gas produced in the
United States creates wealth, jobs, and tax revenues at every level of government.
Unfortunately, our nation is rapidly losing much of its ability to domestically produce
the country's primary sources of energy ~ oil and natural gas, which account for
nearly 65 percent of the total energy consumption in the United States.
THE NEED FOR TAX POUCY CHANGES. EarUer this year, the IPAA testified
before this subcommittee on H.R. 1024, the Energy Independence, Infrastructure, and
1248
Investment Act of 1993, that proposes tax policy changes to maintain and enhance
existing domestic natural gas and oil production, especially from economically
marginal wells, and to encourage investment in new drilling. Without these or similar
changes in tax policy, our nation will grow ever more dependent on imported crude
oil as more domestic wells are plugged and abandoned, their resources effectively lost
forever.
The United States has a rich endowment of potential domestic natural gas and
oil resources that, with favorable exploration and development policies, can
significantly reduce future oil imports. However, these resources will not be
discovered and produced so long as our country does not aggressively counter the
efforts of other governments to capture the capital investment needed to develop
energy resources. The United States cannot sit idly by while every other nation with
energy resource potential provides inducemenU to oil and natural gas investments.
Our government does seem to understand the need for economic inducements
for natural gas and oil development. The United States is providing more than $2.5
billion in loans, loan guarantees, and other economic inducements this year for oil
development in Russia, through the Overseas Private Investment Corporation, a
federal agency. Independent producers, who account for about 60 percent of domestic
natural gas production and about 40 perxxnt of domestic crude oil production, are
eager for economic conditions which would allow us to increase domestic natural gas
and oil production. We also urge Congress to create incentives for maintaining and
expanding production from the nation's marginal wells.
MARGINAL WELLS. The United States operated slighUy more than 875,000 oil
and natural gas wells in 1992, according to World Oil. About two-thirds of those
wells are oil wells, or about 595,000 wells. Nearly 78 percent of the nation's oil
wells are stripper wells, with an average per well output of about 2.2 barrels per day.
Marginal wells - defined in the tax code as those wells that daily produce less
than 15 barrels of oil and 90 thousand cubic feet of gas - are essential to our domestic
energy supply. They provide approximately 20 percent of domestic oil production in
the lower 48 states. These high-cost marginal wells collectively produce more oil than
we import from Saudi Arabia. Many stripper wells are already uneconomic to
operate. Producers continue to operate these wells in hopes of higher future prices,
but too often are economically forced to abandon the producing property before the
mineral deposit has been exhausted. Stripper wells, which represent over 15% of
domestic proven reserves, have been abandoned at rate of over 17,000 wells per year
for each of the past 10 years. Once these wells are abandoned, their production and
proved reserves are permanently lost, and our foreign energy dependency grows.
1249
Let me point out, as the attached map clearly shows, that the greatest
beneficiaries of changes in tax policy affecting marginal wells are states not
traditionally viewed as "oil producing states."
DOMESTIC DRILLING. Just as we must preserve the productive capacity of
existing wells, the nation must also encourage investment in drilling for new wells.
Last year, drilling for domestic natural gas and crude oil hit the lowest level since
records were kept beginning in the 1940s, and 1993 looks only slightly better.
H.R. 1024 is intended to spur new drilling, as well as improving the economic
life of existing production. The n>AA supports the goals of this proposal; at the same
time we have continued to explore alternative approaches to achieve the goals of H.R.
1024. The IPAA Management Committee recently approved a production-based credit
proposal for existing marginal wells and new drilling, based on the approach used
under the Non-conventional Fuels Tax Credit, as follows:
ELEMENTS OF THE PROPOSAL
L NEWLY DRILLED WELLS would be eligible for a tax credit, based on
production, as follows:
a) Newly drilled natural gas wells would receive a $0.50 per Mcf tax credit for
the first 2Q Mcf per day. Natural gas production in excess of 90 Mcf per day
will receive a tax credit equal to $0.10 for each Mcf of such additional
production per day.
b) Oil wells drilled in producing properties which produce an annual per well
average of 25 barrels of oil per day or less would receive a production tax
credit of $1 .55 for each of the first 2 barrels of oil produced per well per day.
The annual average production would be determined after considering the
production from the newly drilled well.
c) Oil wells drilled in nonproducing properties which produce an annual per well
average of 25 barrels of oil per day or less, would receive a production tax
credit of $1.55 for each of the first 15 barrels of oil produced per well per day.
n. EXISTING STRIPPER WELLS. Existing oil and/or natural gas wells which on
the date of enactment or subsequently qualify as a Stripper Well property would
receive a production tax credit in the following amounts:
a) Oil: $1 .55 for each barrel of daily production up to 3 barrels per day.
b) Natural Gas: $0,268 per mcf of daily production up to 18 mcf per day
1250
in. OTHER CHARACTERISTICS
• Effective for production after June 1, 1994. The rate of the tax credit would be
phased-in by one-third each year between 1994 and 1996, and indexed for
inflation thereafter.
• Available to carry back 3 years (but not to a year which precedes the enactment
date) and carry forward 15 years.
• Creditable against regular tax and alternative minimum tax, but not refundable.
• Available to working interest owners only. The credit would not be allowable
for interests held by nonworking interest royalty owners, or royalty interests
held by nonprofit organizations such as governments, universities or Indian
tribes, etc.
• Workovers/recompletions earn the new well credit on incremental production.
• Only wells operating at their most efficient flow rate would qualify for the tax
credit. Otherwise qualifying stripper wells operating at reduced production
rates in accordance with state regulation will not be disqualified.
• Stripper wells which have increased their efficient production through work-
over expenditures to levels in excess of the stripper well rate will be allowed to
retain eligibility for the tax credit for production up to the stripper well limits.
(Qualification would continue under provisions similar to the newly drilled well
limitations.)
• Existing Section 29 wells not be eligible for the marginal well production tax
credit, until the existing Section 29 tax credit expires.
• Properties producing both oil and natural gas, a conversion ratio of 6 Mcf per
barrel of oil would be used to calculate equivalent oil production, and eligibility
would be determined by adding barrels of oil produced to the oil-equivalent of
gas produced from each well.
NATURAL GAS DRILLING. The tax proposal outlined above will attract new
capital and new drilling activity to all geographic regions of the domestic industry. It
is needed. For the first time in several years, the industry needs to increase natural
gas drilling levels to meet demand. Government agencies and private analysts have
estimated that SOO-600 rigs need to be drilling for natural gas to meet projected
consumption. Only 298 gas rigs were drilling the week of May 7, 1993.
1251
Equally important, the production-based credit will give a signal to domestic
producers that their industry's contributions are viewed as necessary to achieve the
administration's energy independence and economic recovery goals. It will also signal
that the health of the domestic oil and gas industry is important to this administration
and that the industry is not being singled out for the economic penalties which are
inherent in all energy taxes.
REVENUE OFFSET. The revenue offset proposed by H.R. 1024 to pay for
production and drilling tax changes could be used for the proposal outlined above.
H.R. 1024 proposes an increase in fees on imported oil and petroleum products.
While this is a preferred revenue offset from IPAA's perspective, the proposal for
increased in fees on imported gasoline, advocated by domestic independent refiners, is
also acceptable to IPAA if used to provide tax policy changes for domestic production
and drilling.
ADMINISTRATION'S POSITION. At the June hearing on H.R. 1024, the Clinton
Administration opposed making the proposed changes in energy tax policy as outlined
in the legislation. The IPAA subsequently met with Assistant Secretary of the
Treasury Leslie Samuels and others in the Department of the Treasury to discuss our
proposals. We have urged the Clinton Administration to recommend tax policy
changes as part of its Domestic Energy Initiative. We understand that the
Administration is considering several tax policy options, including an oil import fee
and a floor price on imported oil.
H.R. 2026, Sections 305 and 306. Finally, Mr. Chairman, I would like to restate the
views of the Independent Petroleum Association of America in opposition to two
provisions of H.R. 2026, Renewable and Energy Efficiency Incentives Act of 1993 -
Section 305 and Section 306. These two sections have virtually no impact on
multinational oil companies; their detrimental impact, which is severe, falls squarely
on the independent section of the domestic oil and natural gas industry and most
particularly on marginal well producers. Section 305 would eliminate the long-
standing and eminently logical distinction in tax law between depreciating assets
(buildings, vehicles, machine tools, etc.) and depleting assets (oil and natural gas
reserves, minerab, etc.) and would undermine an important element of the capital
structure which, quite frankly, barely sustains the domestic independent oil and natural
gas industry today. Section 306 repeals the exception from passive loss limitation for
working interests in oil and natural gas properties. This provision would virtually
eliminate a primary source of investment capital for domestic oil and natural gas
exploration and development ~ other oil and natural gas producers! Eliminating
working interest investment capital, as proposed in Section 306, would reduce
substantially the already anemic capital investment in drilling.
1252
1. U.S. Congress, Office of Technology Assessment, U.S. Oil
Import Vulnerability: The Technical Replacement Capability.
OTA-E-605 (Washington, DC: U.S. Government Printing Office,
October, 1991) .
2. Petition was filed under Section 232 of the Trade Expansion
Act of 1962, as amended, (19 U.S.C. 1862).
3. The 1992 annual rig count was 721.
1253
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1254
Mr. Payne. Our next witness, representing the Petrochemical
Energy Group and the Coalition on Energy Taxes, is David
Damron, manager of government affairs, Hoecnst Celanese Chemi-
cal Corp., Dallas, Tex.
STATEMENT OF R. DAVID DAMRON, MANAGER, GOVERNMENT
AFFAIRS, HOECHST CELANESE CORP., INC., ON BEHALF OF
THE PETROCHEMICAL ENERGY GROUP AND COALITION ON
ENERGY TAXES
Mr. Damron. Thank you, Mr. Chairman. I will limit my verbal
comments today to three concluding statements and one rec-
ommendation.
First, an oil import tax is a poor way to raise revenues. The ulti-
mate cost in jobs, in competitiveness, in Government outlays, far
exceeds the other benefits.
Second, the failures of past efforts to use a tax on imported oil,
that is ranging from regulation of domestic oil, windfall profit
taxes, and a bureaucracv allocating competitive advantages and
trying to achieve regional equity in prices of oil, should not be vis-
ited again on the American people.
Third, an oil import tax will not address the problem of access
to new sources of domestic oil and will induce problems with for-
eign sources, particularly if there is selective and discriminatory
application.
The recommendation that we have is that the solution is to re-
frain from imposing any tax on imported oil or refined petroleum
products.
Thank you.
Mr. Payne. Thank you.
[The prepared statement follows:!
1255
BEFORE THE SUBCOMMITTEE ON SELECT REVENUE MEASURES
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
TESTIMONY IN OPPOSITION TO AN OIL IMPORT TAX
ON BEHALF OF
THE PETROCHEMICAL ENERGY GROUP AND
THE COALITION ON ENERGY TAXES
September 8, 1993
Thank you Mr. Chainnan. My name is R. David Damron and I appear
today on behalf of the Petrochemical Energy Group ("PEG") and the Coalition on
Energy Taxes ("COET') at the hearing of September 8, 1993, as announced by Press
Release #9. We appreciate the opportunity to be heard.
The companies represented are independent chemical companies.' That
is, we are not vertically integrated with major oil companies. We are industrial
consumers. We are not major producers, refiners, transporters, or marketers of oil or
refined petroleum products. But we are major manufacturers who must consume oil and
its derivatives in order to make goods for sale in the domestic and foreign markets.
Petrochemical manufacturers have the additional distinction of requiring
oil and its derivatives, not only for fuel, but also for raw materials.
A. SUMMARY STATEMENT: THERE SHOULD BE NO FURTHER TAX
IMPOSED ON OIL OR REHNED PETROLEUM PRODUCTS
One of the proposals under consideration at this hearing is:
"Natural Resources"
"2. A proposal to increase the tariff on imported crude oil
by 15-cents-per-barrel and refined petroleum products by 1-
cent-per-gallon."
We respectfully urge that there be no new tax imposed on imported crude
oil or on imported refined petroleum products. A tariff or tax on imported oil and
product can be expected to:
(1) decrease domestic jobs and productivity, thus lowering tax revenues
and increasing social costs;
(2) decrease competitiveness of American-based companies in both the
domestic and export markets, thus lowering tax revenues and further eroding the balance
of trade;
(3) increase costs to all consumers of oil, just as the BTU tax on oil
would have done, had the Congress decided to enact one in connection with the Budget
Reconciliation Act;
(4) result in the revival of an elaborate bureaucracy to administer the
program and to grant exemptions, subsidies, and entitlements to both domestic and
foreign oil, and to resolve claims for redistribution of taxes and costs among States and
Regions of the country;
(5) result in a revival of the Windfall Profit Tax on domestic oil;
^Air Products & Chemicals, Inc., Dow Chemical Company, Eastman Chemical Company,
Goodyear Tire & Rubber Company, Hoechst Celanese Corporation, PPG Industries, Quantum Chemical
Corporation, and Union Carbide Corporation.
1256
(6) be ineffective in encouraging exploration and production of new
domestic oil reserves;
(7) be ineffective in stemming imports; and
(8) be inconsistent with respect to taxing imports, the inconsistency
being based upon country of origin.
The reasons for these expectations are set forth below under three
groupings:
B. The Effect on Jobs and Competitiveness is Too Negative to Justify
an Oil Import Tax as a Deficit Reduction Measure.
C. An Oil Import Tax Has Been Tried In The Past and Was a
D. A Tax or Tariff on Foreign Oil Will Not Serve To Displace Imports.
In connection with our testimony, we do not intend to discuss the levels of
the proposed taxes or the differential between the tax on crude oil and refined
petroleum products. We believe that, to do so, would detract from the point: no
additional tax, at any level, should be enacted. Whatever the rate in the initial
legislation, the amount could be changed upward at any time. Therefore, the amount
only affects the degree of harm.
B. THE EFFECT ON JOBS AND COMPETITIVENESS IS TOO NEGATIVE
TO JUSTIFY AN OIL IMPORT TAX AS A DEnCIT REDUCTION
MEASURE aXEMS A(l) TO A(3)).
Such a tax operates to drive the price of both foreign and domestic oil
above the world oil price. This directiy affects the abihty of domestic enterprises to
compete with foreign sources, thereby reducing domestic jobs and the ability of domestic
companies to compete in both the American marketplace and the world marketplace.
There is already a serious problem facing this country with respect to the
balance of trade. The Washington Post of June 16, 1993, reported that the United
States is running an even larger deficit in the trade of goods. "Foreign demand for U.S.
products continued to erode, totalling $112 billion in the first quarter, down from $114
billion the previous quarter. But U.S. imports of goods increased a fraction, to $140
billion." A headline in the August 20, 1993, issue of The Washington Post reads "U.S.
Trade Deficit Hit Six- Year High in June; White House Voices Fear Over Yen's
Strength".
A basic policy question to ask is whether it is prudent to affect adversely
the ability of American industry to produce goods and to provide jobs in the country by
adding still another tax in the form of an oil import fee?
I appear today as a representative of one segment of American industry, a
segment that can be called "chemical" companies. Chemicals have been more exported
than imported into this country. This has been a bright spot in the balance of trade,
contributing a positive $16.3 biUion in 1992 and providing employment for some 1.1
million employees. (Bureau of Labor Statistics, U.S. Department of Labor,
"Employment and Earnings" (June 1993).)
Unfortunately, the trend is not good, due to global competition. In 1991,
the positive balance of trade was $18.8 billion. (U.S. Bureau of Census, U.S.
Department of Commerce, "U.S. Merchandise Trade, Jan 1991- Dec 1992 Final
Report".) We need no further handicaps to our competitiveness.
1257
Just to nail down the point, the Department of Commerce has noted that
"small price differentials of its commodity products can determine whether it is better to
produce or import primary petrochemicals." (International Trade Administration, U.S.
Department of Commerce, U.S. Industrial Outlook 1993. "Chemicals and Allied
Products" at 11-3 (1993).)
The Congress recently decided to raise revenues through a motor fuels tax
and not through a BTU tax. (Omnibus Budget Reconciliation Act, Pub.L. No. 103-66.)
An oil import tax has the same basic effect as a BTU tax on oil - it raises the cost of
petroleum-based energy and feedstocks to residential, commercial, electric utility,
transportation, and industrial consumers. Hopefully, the issue will not be revisited.
Since we must withstand the allegations, obviously true, of being personally
interested in the outcome, we respectfully suggest that we share views with a wide variety
of expert Government agencies, and we would like to suggest review of several studies.
It is appropriate to review what the Congressional Budget Office ("CBO")
found in its April, 1986 Study entitled "The Budgetary and Economic Effects of Oil
Taxes." Two particular passages are relevant to this discussion. First, there is
recognition that the tariff receipts as well as the higher taxes collected from domestic oil
producers as a result of higher prices "would be offset by reduced corporate profits and
personal incomes elsewhere, as higher energy prices raised business costs and reduced
the income available for consumption of other goods and services." (Congressional
Budget Office, "The Budgetary and Economic Effects of OU Taxes", at 17 (1986).^)
Second, the CBO in the same study, devoted a section to the "Effects on
U.S. Trade and Competitiveness" at 39-42, a section recommended for study. Included
at 39 is this statement:
Whatever the net effects of oil taxes on the balance of trade
and exchange rates, U.S. comparative advantage in
international trade would be likely to shift away from those
industries that are relatively oil intensive or energy intensive,
since their foreign competitors would not be paying an added
tariff on their energy or oil inputs [footnote omitted]. This
would force U.S. firms to reduce their output or else accept
smaller margins.
The CBO identified industries which it found to be vulnerable. These
included paper, particularly in New England and the Middle Atlantic States, the
chemical industry ("[t]he U.S. chemical industry also has substantial exporte that could
be placed at risk if their prices rose substantially", id at 41), and agricultural exports.
The CBO is not alone in reaching these conclusions. The "National
Energy Strategy: Powerful Ideas for America", noted that measures such as an oil
import fee would have an adverse affect. ("National Energy Strategy: Powerful Ideas
for America" at 5 (February 1991).) "But the cost would be very high - in higher prices
to American consumers, lost jobs, and less competitive U.S. industries." Id (Accord
U.S. Department of Energy, "Energy Security: A Report to the President of the United
States" (March 1987).)
The Bureau of Economics Staff Report to the Federal Trade Commission,
puts it this way: "The costs of using a tariff on oil imports to raise revenue appear to be
quite high. At a minimum, the figures suggest that serious consideration should be given
to finding a less-costly alternative before such a policy is adopted." (Keith B. Anderson
'For the sake of completeness, the CBO Ubles indicate a conchision that the tariff plus the corporate
income and windfall profit taxes collected from domestic oil consumers as a result of the tariff would be
greater than the loss of revenue in the consuming sector and residential sector, a conclusion noted to be
inconsistent with that of DRI in the Congressional Research Service's report entitled "Oil Import Tax;
Some General Economic Effects", CRS Report for Congress No. 87-259 E (1987).
1258
& Michael R. Metzger, Bureau of Economics, Federal Trade Commission, "A Critical
Evaluation of Petroleum Import Tariffs: Analytical and Historical Perspectives", at 52
(April 1987).) In sum, the cost to consumers and the cost to the economy are found to
be greater than the tariff revenue raised.
Please also consider the March 1987 report of the Congressional Research
Service of the Library of Congress entitled "Oil Import Tax: Some General Economic
Effects" at 3 stating:
An oil import tax would reduce the Federal Government
budget deficit by less than a naive calculation would indicate.
Lx»wer economic activity would cut Government tax revenues;
and higher prices would increase transfer payments with cost-
of-living adjustments and Government ouUays for suppUes.
Higher prices would also raise Government receipts — by
more than the outlays are boosted, but not enough to offset
the effect of lower GNP.
Further, "[a]n oil import tax initially would tend to worsen the competitive
position of certain U.S. industries. Energy costs of domestic energy-intensive indus-
tries ~ such as petrochemicals, paper, and primary metals - would tend to increase,
while relatively lower oil prices abroad would lower production costs of competing
foreign industries." Id at 7.
Even avid proponents of an oil import fee concede the impact on
competitiveness. The Energy and Environmental Policy Center at Harvard University,
acknowledges that an oil import fee will destroy the ability of domestic petrochemical
companies to compete in both domestic and world markets. (William W. Hogan &
Bijan Mossanar-Rahmani, Harvard International Energy Studies. "Energy Security
Revisited", (published by the Energy & Environments Policy Center, Harvard University
(1987).) The suggestion is either that we simply go out of business in favor of foreign
sources or that we seek government subsidies in order to remain in business. Neither is
an attractive option to us. We hope that neither driving energy intensive manufacturers
out of business nor subsidizing them is an attractive option to the Congress either,
particularly for those industries who now manage to compete successfully in world
markets and earn a favorable balance of trade for this nation.
Therefore, we respectfully suggest that the costs of an oil import tax are
too high, and the tax on imported oil and refined petroleum products should not be
adopted.
C. AN OIL IMPORT TAX HAS BEEN TRIED IN THE PAST AND WAS A
DISASTER (ITEMS A(4) AND (S)).
The concept has been tried in the past and abandoned. Oil import quotas,
fees, tariffs or taxes did not work. The disruptions to the economy were both real and
intense. The program, in any form, should not be revived. Once should be enough.
The oil import quota, fee, or tax was imposed in this country in one form
or another from 1958 until 1981. (Exec. Order No. 12,287, 3 C.F.R. 124 (1981), reprinted
in 46 Fed. Reg. 9909. (1981).) Now, even twelve years later, the complexities and the
litigation arising out of that entire scheme have still not been resolved. (Final Filing
Deadline in Special Refund Proceeding Involving Crude Oil Overcharge Refunds, 58
Fed. Reg. 26,318-26,319 (1993).)
In brief summary, from 1958 until the early 1970's, a "quota" system was
imposed on grounds of national security. This was called the "Mandatory Oil Import
Program", or MOIP. At the time, the U.S. had the ability to supply all the oil that this
country needed as well as to meet the needs of foreign countries in times of crisis. The
basic thought was that foreign oil, being cheaper following World War II, would displace
too much domestic production and, thus, had to be limited.
1259
The program started out as a system whereby imports of foreign oil and
foreign refined products were "licensed" for import, sometimes called "tickets". Since, at
the time, foreign oil was perceived to be "cheaper" than domestic oil, the ability to
import provided a profit opportunity represented by the difference between the price of
a domestic barrel and the price of a foreign barrel. Companies who had "tickets"
allocated to them by the Federal Govenmient thus gained a competitive advantage over
those who did not get an allocation of "tickets" from the Federal Government.
Needless to say, before a decade was over, legislative and administrative
battles were fought for exemptions from the quotas for certain regions and the "tickets"
were distributed to refiners and petrochemical companies in ways that the Government
thought achieved economic equity. (See Cabinet Task Force on Oil Import Control,
"The Oil Import Question: A Report on the Relationship of Oil Imports to the National
Security", (February 1970).)
The Petrochemical Energy Group came into existence in 1972 for the
purpose of seeking equity between independent petrochemical companies and the
petrochemical arms of major refiners, who were allocated "tickets."
The second phase started in the early 1970s, not uncoincidentally about the
time that the Texas Railroad Commission and the other producing states went to 100%
allowables, or the equivalent thereof, for their programs for prorationing the production
of oil. To OPEC or elements thereof, this was the signal that the U.S. had not only lost
its ability to send oil to Europe in times of crisis, such as the brief war over the Suez
Canal, but that the U.S was no longer self sufficient. It may be better to express this
point in the exact words of the Congress of the United States in the Emergency
Petroleum Allocation Act of 1973:
Sec.2(a) The Congress hereby determines that -
(1) shortages of crude oil, residual fuel oil, and refined
petroleum products caused by inadequate domestic
production, environmental constraints, and the unavailability
of imports sufficient to satisfy domestic demand, now exist or
are imminent.
The rest, as they say, is history. The quota system did not maintain and
protect domestic production capability so that the U.S. could be self-sufficient in oil.
Imports became a practical necessity over twenty years ago.
At least two major embargoes of exports to the United States took place in
the 1970s, together with rapidly escalating oil prices, led by the prices from abroad. (See
Daniel Yergin, The Prize: The Epic Ouest for Oil, Money, and Power (1992).)
A quota, of course, became obsolete, and the "fee" (another word for tax
or tariff) on imported oil was substituted. Not only did an oil import fee come into
existence, but the regulatory bureaucracy needed to manage the MOIP had to be
expanded in order to take over the allocation and pricing of domestic oil as well as to
allocate subsidies and the like. A new feature was added: a Windfall Profit Tax on
domestic oil. These two features will be discussed immediately below.
First, there was the enlargement of an even more elaborate regulatory
scheme, far eclipsing that under the quota system. This included agencies for allocating
and pricing both domestic and foreign oil and refined petroleum products. While the
degree of regulation varied over the next decade, at its zenith the effort was made by the
federal government to equalize the cost of all domestic oil and all imports as well as to
provide subsidies to those enterprises thought deserving of subsidy. Rather than
"tickets", these were called "entitlements." Entitlements were exchanged for cash. The
Department of Energy's current Secretary -- the Honorable Hazel O'Leary ~ was, in her
1260
prior Government service, in charge of this elaborate bureaucracy.' Such a bureaucracy
lies dormant at the DOE, with ration books and allocation schedules ready to go, once
the Government sets a differentia] between foreign and domestic oil and the scramble is
on to evade the tax, to profit from the tax, or to minimize the competitive harm in the
tax. See 10 C.F.R. § 211, App. A (1993).
Second, there was a Windfall Profit Tax. (Crude Oil Windfall Profit Tax
Act of 1980, Pub.L. No. 96-223, 94 Stat 229 (April 2, 1980)(repealed 1988).) In essence,
this tax sought to divert to the Treasury some of the price increases for domestic oil and
product which were made possible by the higher foreign prices plus the oil import tax,
acting as a tariff barrier. (The Btu tax, included in the House-passed version of the
Omnibus Budget Reconciliation Bill of 1993, had the same basic effect as a Windfall
Profit Tax in that it was applicable both to domestic and to foreign oil.)
In net effect, the two phases were remarkably similar, as stated in a Report
of the Department of Energy entitled "The Effect of Legislative and Regulatory Actions
on Competition in Petroleum Markets." The following statement sums it up:
Domestic oil prices, now regulated by formal price controls,
were previously regulated (in effect) through state pro-
rationing laws and oil impori quotas. The cost equalizations
among refiners made possible by the Entitlements Program
exhibited similar tendencies under the quota tickets of the
Mandatory Oil Import Program. The same groups which
received special benefits under pre-Embargo regulations now
receive those benefits under new regulations; small refiners,
importers of residual fuel oil into the East Coast, and PADD
V refiners all receive special consideration under the
Entitlements Program similar to that received under the
MOIP. The only change in the focus of the regulations
appears to be the direction of price controls. Whereas
before the Embargo, domestic oil prices were supported at a
higher level than would have been obtained by market forces,
the current regulations maintain them at a lower level than
the "free" market price.
("The Effect of Legislative and Regulatory Actions", supra note 3, at 59.)
The last sentence in the above quote sums up the basic question: is the
effect, if not purpose, of the tax to drive domestic prices up or to hold them down? If
there is a differential in tax between foreign and domestic oil as a result of the tariff,
who gets the benefit of the differential? Who administers it? Will all or some of the
differential be taken in taxes on domestic oil or not - e.g.. the revival of the Windfall
Profit Tax? Are there those who should be sheltered or subsidized by means of the
taxes? Should those who live in States where the imports arrive pay all of the tariff or
should some method be devised to spread the tariff to other regions? Or should the
States, such as those on the Eastern Seaboard, be exempted from the import tax and the
tax rerouted to other regions?
'Some recommended sources for further study are Reserves and Natural Gas Division Office of
Oil and Gas, U.S. Department of Energy, "A Chronology of Major Oil and Gas Regulations Issued
Through October 1985", D0E/EIA-M016 (1986); Energy Information Agency, U.S. Department of
Energy, "The Impact of the Entitlements Program on the Market for Residual Fuel Oil on the East Coast"
DOE/EIA 0184/29 (February 1980); Energy Information Agency, U.S. Department of Energy, "The Effect
of Legislative and Regulatory Actions on Competition in Petroleum Markets", DOE/ElA-0201/2 (October
1979); Energy Information Agency, U.S. Department of Energy, "EffecU of Oil Regulation on Prices and
Quantities: A Qualitative Analysis", DOE/EIA-0201/1 (October 1979); Energy Information Agency, U.S.
Department of Energy, "Effects of Oil Regulation on Prices and Quantities: A QualiUtive Analysis",
DOE/EIA-0184/3 (May 1979); Energy Information Agency, U.S. Department of Energy, "The Effect of
Legislative and Regulatory Actions on Competition in Petroleum Markets", DOE/EIA-0 187/7 (April 1979);
Energy Information Agency, U.S. Department of Energy, "Proposed Amendments to the Entitlements
Program with Respect to Imported Residual Fuel Oil", DOE/ElA-0102/30 (July 1978).
1261
These are some of the issues that arise whenever an oil import fee, tax, or
quota is considered. These and other issues are thoroughly explored in "A Critical
Evaluation of Petroleum Import Tariffs: Analytical and Historical Perspectives", Bureau
of Economics Staff Report to the Federal Trade Commission (April 1987). Particularly
recommended for review is the Conclusion on page 31, wherein the inevitability of
appealing to the political process for "special deals" is discussed, since "substantial
economic benefits would accrue to parties who obtained exemptions from a tariff that
allow them to import without restrictions. Such special deals could take the form of
exemptions for certain products, for products imported from certain countries, or just for
imports by certain firms." Furthermore, page 56 of the same report states:
In the course of designing and implementing a tariff, various
parties will seek, and likely obtain, special exemptions. Such
exemptions, whether for certain products, firms, or countries
exporting to the United States, would be particularly valuable
to the favored groups. However, tariff revenues would
probably be reduced as a result, and administrative costs
would likely be increased. Moreover, many of these special
exemptions would encourage inefficient U.S. production of
refined petroleum products and of other products. As a
result, the U.S. would become less competitive in world
markets. All of the above points suggest that the social costs
of a tariff would be greater than our estimates. Similar costs
are likely if other policies are used to aid the oil industry.
The oil import fee, or tax, or tariff, or quota died a natural and welcome
death over a decade ago. Please let it rest in peace.
If it is to be revived, please then provide for sufficient exemptions to
maintain parity of the domestic manufacturing industry with foreign-based manufacturing
industry and please maintain parity among the domestic manufacturers so that the
Government does not give a competitive advantage to one segment over another.
Also, please set standards for the bureaucracy which will be needed to
administer the program. Please assure that all who ask to be heard on the question of
allocations and exemptions - and their adversaries or competitors ~ be given a fair and
expeditious hearing. The federal agency which will be given responsibility for
administering the program should be clearly identified fiom the start
D. A TAX OR TARIFF ON FOREIGN OIL WILL NOT SERVE TO
DISPLACE IMPORTS GTEMS A(6) TO A(8)).
This country, years ago, elected to utilize a Strategic Petroleum Reserve
("SPR") as the primary means of dealing with supply disruptions. The SPR deals with
the situation where foreign sources choose to cut off exports to the United States. The
tax or tariff deals with the situation where imports are being discouraged and,
presumably, domestic sources gain the protection of a tariff barrier and can raise prices
on current and future production. The question is: what can reasonably be expected as
a result?
For purposes of this section, we assume the following scenario: there will
only be a tax on imported oil and imported refined petroleum products; that there will
be no price controls imposed on domestic oil or product; that there will be no Windfall
Profit Tax imposed on the domestic production; that the tax will act as a tariff barrier
allowing all domestic prices to rise at least to the level of the tariff; and that all of this
differential is retained by the producers and refiners of oil.
1262
The first expectation that should be considered is that of regional fairness.
It probably can be taken as a given that consuming States, particularly those along the
Eastern Seaboard, would bear the brunt of an oil import tax. The expectation might be
that producing states would be the beneficiaries of an oil import fee, but this expectation
cannot be taken as a given. It has been tested.
If there is any State in the Union which could be expected to benefit from
the scenario stated above, it is the State of Texas, a State near and dear to the hearts, as
well as the location of plants of many petrochemical companies. However, "an oil
import fee is not likely to have a significant impact on the state's economy." (Texas
Economic Outlook. "How Would an Oil Import Fee Impact the Texas Economy",
published by the Center for Business and Economic Analysis, Graduate School of
Business, Texas A & M University, at 5 (February 1992).) That quotation was
summarizing the conclusion of the study "Impacts of Oil Import Fees on the Texas
Economy," conducted at the same institution, by Dr. M.A.M. Anari, Research
Economist, and Dr. Jared E. Hazelton, Director.
If there will not be a significant impact on the economy of a producing
State as key as Texas, where and how will there be an effect? The next expectation is
that an oil import fee would be beneficial to the domestic oil industry and, therefore, to
this country by fostering a significant increase in exploration and development of new oil
reserves. The objective then, of an oil import tax, would be to foster a significant
increase in exploration and development of new oil reserves.
PEG will yield to none in associating with the view that it is extremely
important that there be a healthy and viable domestic oil and gas industry and that
encouragement for exploration and development of new oil reserves is indeed important
Therefore, any possible "stimulus' for exploration and development should be carefully
considered.
The question is, is a tariff on imported oil an effective answer to the need
for exploration and development of new domestic oil and gas reserves?
We think not. The problem involving exploration and production of new
oil reserves is not going to be solved or even addressed by a tariff on imported oil or any
indirect subsidy to some or all domestic oil production and refining. What is needed is
access to promising new sources of domestic supply for the purpose of exploration and
production. The problem is caused by the fact that it is the national policy of this
country to deny access to promising new sources of domestic supply.
Perhaps the best way to demonstrate this last point is to quote from the
Report to Stockholders of the Chevron Corporation for the First Quarter of 1993. The
headline on page five and the first two paragraphs are quoted:
CHEVRON IS SHIFTING EXPLORATION AND
PRODUCTION EFFORTS OVERSEAS.
Chevron is shifting its exploration and production emphasis
to areas with the strongest potential for large discoveries
and cost-effective production. Vice Chairman Dennis Bonney
told stockholders.
"Most of the new opportunities lie outside the United States,"
he explained. This is partly because most of the world's
"truly attractive untapped petroleum reserves are overseas."
Also, "many U.S. Regions with high potential have been
placed out of the industry's reach by government actions."
1263
The Office of Technology Assessment ("OTA"), an ann of the Congress, in
its October 1991 summary "U.S. Oil Import Vulnerability: The Technical Replacement
Capability" at 17, indicates a similar conclusion:
The scarcity of new opportunities for finding large new oil
fields within the mature oil regions of the lower 48 States has
created pressure for the Federal Government to open to
exploratory drilling and development a number of promising
areas currently off-limits to such activities, such as the Arctic
National Wildlife Refuge (ANWR), offshore California, and
other frontier areas.
The OTA notes on that same page that DOI has estimated that ANWR
has a 46% chance of recovering 3.6 billion barrels -- "a potential resource equivalent to
the third largest discovery in U.S. territory and one that, for a few decades, could deliver
several hundred thousand barrels of crude oil per day to the lower 48 States." Id.
(footnote omitted).
These statements by a major oil company and the OTA, we fear, reflect all
too well the current situation. This nation cannot expect to maintain its ability to
produce and to refine domestic oil even at current levels if access to the resource bases
are denied by the Federal Government.
We recognize that this is an unpopular subject. We know full well that the
National Energy Strategy called for "environmentally responsible development of
promising areas like ANWR and OCS." (National Energy Strategy, supra, at 3.) We are
aware that legislation to achieve that result died on the floor of the Senate and did not
make it to the Energy Policy Act of 1992. (137 Cong. Rec. S15,754 (daily ed. Nov. 1,
1991)(Rollcall Vote No. 242, failure to invoke cloture on motion to proceed to
consideration of S. 1220, National Energy Security Act of 1991).) To us, the conclusion
to reach is that the Congress is not presently prepared to address issues related to access
to the resource base for new domestic oil reserves. Whether that is good or bad public
policy makes no difference here. It is the fact.
The inescapable corollary is that higher and higher percentages of oil
imports must be accepted. Without a significant increase in access to potential reserves
in this country for the purposes of exploration and production, imports are bound to
increase in volume, and the question is not whether, but where, the imports come from.
Taxing the imports only adds to the cost.
As Section B demonstrates, an oil import fee is a poor source of revenues.
Section B assumes, arguendo, that an import tax will be collected on all foreign oil and
all foreign refined petroleum products. This assumption is extremely unlikely to be
achieved in practice, thereby both reducing anticipated tax revenues and increasing
administrative costs to the Government and extraneous costs to the economy. The
expectation would be that some countries' exports to the United States would be
exempted from the tax.
Where the imports come from raises this thorny issue for those who would
impose a tax on imports: would any foreign source be exempt? Canada, for example,
under the Free Trade Agreement? What about the other countries who now provide oil
to the United States? According to the EIA, some 32 countries other than Canada have
exported to the United States continually or from time to time over the last twenty
years. (Office of Energy Markets and End Use, U.S. Department of Energy, Monthly
Energy Review. Tables 3.3(a-h), DOE/EIA-0035(93/07)(July 1993).) Would the
Congress exempt any foreign source from an import tax? Or would that be a decision
for the Administration to make?
1264
The GAO, in its 1986 Report entitled "Petroleum Products, Effect of
Imports on U.S. Oil Refineries and U.S. Energy Security", had this admonition:
Possible side effects should also be considered in weighing
the desirability of tariffs or quotas. One such side effect is
the potential for retaliatory trade measures by other nations
in response to U.S. tariffs or quotas. For example, product-
exporting nations could establish restrictions on purchases of
U.S. products, or reduce cooperation with the United States
in other areas. In addition, other product-importing nations,
principally members of the European Economic Community
and Japan, may respond to U.S. trade restrictions with
restrictions of their own. As we noted in chapter 3, Japanese
government officials have indicated a possible relaxation of
its ban on imports of gasoline and other products, and the
Conmiunity presently does not enforce trade restrictions
against Saudi Arabia, Kuwait, and other major product-
exporting nations. Retaliatory measures by these countries to
restore or augment trade barriers could undermine the
effectiveness of the U.S. trade restrictions.
(General Accounting Office, "Petroleum Products, Effect of Imports on U.S. Oil
Refineries and U.S. Energy Security", GAO/RCED-86-85 at 63 (April 1986).)
In sum, imposing an oil import tax is not going to do anything to increase
access to the most promising potential new reserves of oil. If the State of Texas is a
good representative of a producing state, an oil import tax will not do much regional
good while harm to other regions is manifest. A host of international trade and other
considerations come into play if the tax is imposed on some countries but not on others.
To the extent that country of origin exemptions are given, tax revenues are reduced and
the regulatory mechanism must police the imports to be sure that the 'country of origin"
is not simply a paper transfer on the high seas, with delivery by displacement.
E. CONCLUSION
We respectfully suggest that we have demonstrated that:
• An oil import tax is a poor way to raise revenues, the ultimate cost
in jobs, in competitiveness, in other government outlays, far exceeding any benefit.
• The failures of the past efforts to use a tax on imported oil, ranging
from regulation of domestic oil. Windfall Profit Taxes, and a bureaucracy allocating
competitive advantages and trying to achieve regional equity in prices of oil, should not
again be visited on the American people.
• An oil import tax will not address the problem of access to new
sources of domestic oil and will induce problems with foreign sources, particularly if
there is selective or discriminatory application.
The recommended solution is to refrain from imposing any tax on
imported oil or refined petroleum products.
1265
Mr. Payne. Our next witnesses will testify concerning the sever-
ance tax on hard rock minerals. Representing the Mineral Re-
sources Alliance and the American Iron Ore Association are Steve
Alfers, counsel, and John Kelly, tax counsel for the American Iron
Ore Association.
Please proceed.
STATEMENT OF STEPHEN D. ALFERS, COUNSEL, MINERAL
RESOURCES ALLIANCE
Mr. Alfers. Thank you, Mr. Chairman. I am Steve Alfers, a
partner in the law firm of Morrison & Foerster from Denver, Colo.
I appreciate the opportunity to be here today on behalf of the Min-
eral Resources Alliance, an association of more than 1,000 mining
companies, vendors and their supporters.
I nave submitted to the committee a written statement and I
would refer the committee to that statement. My comments here
today will be brief.
We oppose the severance tax proposal. We think it has four very
serious problems. First, the proposal does not define either a meth-
od of calculation or the basis of the severance tax. The proposal
calls for a 12 percent tax on hard rock minerals, but does not speci-
fy what minerals are to be taxed, the basis upon which the tax
would be calculated or whether the taxes be levied on minerals
from public lands, private lands or both.
We can't tell whether the tax would be limited to metals or also
include nonmetallic minerals, industrial minerals such as talc and
some of the strategic minerals, the rare earths, or even ferrous
metals. No data has been assembled to determine the revenue im-
pacts of the tax. No detailed financial or economic analysis of the
proposed tax exists from which an accurate projection of revenues
could be determined. Revenue projections would be guess work.
Congress should not consider this new tax without first conduct-
ing a study to determine the revenue impact of the tax. It is impos-
sible to predict the impact of the proposed severance tax without
applying that tax to real numbers from real existing hard-rock
mining projects. Short-term economic analysis is especially mis-
leading in the mining industry.
Economic projections should be based on long-term economic
analysis and the models should incorporate actual financial and
production data from U.S. mining operations covering a variety of
metallic and nonmetallic mineral deposits. Producing gold is not
like producing lead or uranium or copper or zinc or beryllium or
other industrial minerals or almost any other mineral, and it is a
mistake to try to project economic impacts based on anecdotal in-
formation about a single metal or a single gold mine.
Finally, based on economic studies of the U.S. mining industry,
it is likely that the net Federal impact would be negative.
A recent study by Coopers & Lybrand and Morrison & Foerster
showed that a Federal royalty on hard rock minerals had a nega-
tive economic impact and high Federal royalties in the range of 8
to 12 percent had a negative impact on the Federal Treasury.
Severance tax on minerals in public lands would have a similar
impact and a severance tax that would extend to minerals on pub-
lic and private lands would have a greater impact. This could be
1266
translated to jobs. Some mines would close. Other mines would
downsize and contract their operations, shorten their mine lines,
throw off employees.
Perhaps the biggest economic impact would be from mine con-
struction projects on the drawing board that would no longer go
forward. These would just simply drop off. That would mean loss
of jobs and tax revenues and loss of exports. We can calculate that.
What we can't calculate is the fact that many mines would never
be discovered, because the exploration dollars would migrate over-
seas at the bleak economics prospects here.
We continue to need the gold and silver and copper and lead and
zinc and beryllium, platinum, chrome, uranium, and many other
commodities, some of which we haven't even discovered yet. That
loss is incalculable. Since 1989, Congress has been considering re-
form of the general mining law governing mining on public lands
in the United States. A bill reforming me mining law has now
passed the Senate and action is expected in the House this year,
perhaps next month. Both bills substantially reform the mining
laws.
New mining fees and royalty on production are part of both bills.
These fees and royalties portend an enormous impact on mining.
In anticipation of these bills, industry has already reduced its hold-
ing of mining claims in the United States by one half Some
sources expect a decline in holding of mining claims by up to 80
percent.
U.S. exploration dollars, a clear signal of whether production will
come in the future, are already migrating overseas. This is not the
time to entertain new taxes on the mining industry. A wiser course
is to let mining law reform play out over these next few weeks.
Then Congress can watch carefully over the next few years the eco-
nomic impact of mining law reforms before considering new taxes
on this beleaguered industry.
Thank you, Mr. Chairman.
[The prepared statement follows:]
1267
HEARING ON MINERAL SEVERANCE TAX ISSXTES
BEFORE THE
SX7BC0MMITTEE ON SELECT REVENCTE MEASURES
COMMITTEE ON NAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
WRITTEN STATEMENT
OF
STEPHEN D. ALFERS
ON BEHALF OF
THE MINERAL RESOURCES ALLIANCE
SEPTEMBER 8, 1993
On August 17, 1993, the Honoraibie Charles B. Rangel
announced hearings to be held before the Subcommittee on
Select Revenue Measures of the House Ways and Means
Committee on September 8th and September 14th. I appreciate
the opportunity to offer testimony on September 8, 1993 on
the impact of a 12% severance tax on the mining industry.
This written statement, which supplements my Preliminary
Statement offered on September 8, contains my assessment of
this proposed severance tax.
INTRODUCTION
Since 1989, Congress has been considering reform of
the General Mining Law governing mining on public lands in
the United States. A bill reforming the mining law has
passed the Senate (S.775) and action is expected in the
House this month or next.
Both bills substantially reform the mining laws.
New mining fees and royalty on production are part of both
bills. These fees and royalties portend an enormous impact
on mining. In anticipation of these bills, industry has
already been adversely affected. The U.S. mining industry
has already reduced its holdings of mining claims by more
than one-half -- some sources expect close to 60% -80%
reductions -- and U.S. exploration expenditures, a clear
signal of future production, are already migrating overseas.
This is not the time to entertain new taxes on the
mining industry. The wise course is to let Mining Law
reform play out over these next few weeks. The Congress
should watch carefully the economic impact of Mining Law
reform before considering new taxes on this beleaguered
industry.
There are four fundamental problems with the
proposed severance tax: l) The proposal does not define the
method of calculation or the basis of the severance tax,
2) no verifiable data has been assembled to determine the
revenue impacts of the tax, 3) Congress should not entertain
such a proposal without conducting a study to determine the
revenue impacts of the tax, and 4) based upon previous
1268
studies, it is likely that the net federal revenue impacts
of such a tax would be negative. I will address each of
these points below.
1. The ProDoaal la Vaoue
The proposed severance tax calls for a 12% tax on
"hard rock" minerals, "such as gold, silver and copper."
The proposal, however, describes neither the minerals to be
taxed, the basis upon which the tax will be calculated, nor
whether the tax will be levied on minerals produced from
both public and private lands.
Perhaps the proposal would impose a tax only on
gold, silver and copper, or, perhaps, all metallic minerals
(sweeping in lead, zinc, platinum, chromium, and beryllium,
to name just a few) . Or perhaps the proposal is to reach
"locatable minerals."^
If the tax is to be applied to all minerals, it
will have an enormous direct impact on nearly every state in
the country. If the tax is to be levied only on "locatable"
1 The list of locatable minerals could include the
following list of minerals: gold, silver, cinnabar, lead,
tin, copper, building stone, salt springs and other deposits
of salt, gilsonite, elaterite or other like substances,
kaolin, kaolinite, fuller's earth, china clay and ball clay,
phosphate, nitrate, potash, asphaltic minerals, sodium,
borax, sulphur, agate, albertite, alkaline substances, alum,
aluminum, cyanite, amber, amphibole schist, amygdaloid
bands, asbestos, asphalt, barium, bauxite, bentonite,
beryllium, borates, brine, calc-spar, cement, auriferous
cement, chalk, French chalk, clays, colemanite, kaolin,
diainonds, diatomaceous earth, fahlbands, galena, gilsonite,
gravel, sand, granite, graphite, guano, gypsum, gypsum
cement, infusorial earth, iron, chromate of iron, oxide of
iron, franklinite, isinglass, lead, black lead, carbonate of
lead, lepidolite, limestone, magnesia, magnesite, marble,
texicalli marble, meteorites, mica, shale, ochre, oil and
gas, oil shale, onyx, opal, ozocerite, paint rock, paint
stone, platinum, plumbago, resin, pumice, salines,
saltpeter, sandstone, silicate, silicated rock, slate,
natural slate, roofing slate, soda, carbonate of soda,
nitrate of soda, sulphate of soda, stone, beds of stone,
building stone, flint stone, free stone, iron stone,
limestone, lithographic stone, lustral stone, stockwerke,
sulphate, tailings, tin, trap rock, tungsten, umber,
ulexite, volcanic ash or pumice, mineral white quartz
suitable for making glass, zeolites, zinc, carbonate,
silicate and sulphide of zinc, tungsten, uranium, vanadium
and zirconium. See. Ricketts, American Mining Law. 4th ed.
1943, Vol I § 11. All of these minerals are "locatable"
under the 1872 Mining Law, though their locatability has
been constrained by a number of subsequent federal statutes,
including the Mineral Leasing Act of 1920, the Materials Act
of July 31, 1947, as amended by the Common Varieties Act on
July 23, 1955, and the Act of September 28, 1962. In
determining what minerals would be taxed, the "locatable"
label complicates rather than simplifies.
1269
minerals or metallic minerals, the tauc will have a
disproportionately large direct impact on the western states
where most of that mineral production occurs. But the tax
would also have a tremendous indirect impact on those
states -- chiefly in the midwest and the mid-Atlantic --
which supply the machinery and supplies used in metals
mining.
The value of a mineral increases as it progresses
through various processing stages, reflecting the value (and
expense) added by the mine operator. A severance tax levied
on the value of the mineral immediately upon severance from
the ground will yield different results than a tax levied on
the value of the mineral as a finished product. Depending
upon the stage at which the tax is levied and the expense
deductions allowed from the taixaJale basis, a severance tax
may result in higher or lower payments, and correspondingly
greater or lesser financial burdens on mineral production.
A number of states impose a severance tax on
minerals in the form of carefully and completely defined
statutes which set forth the basis for those taxes. The
federal severance tax proposal provides no detail as to the
method of calculation. Without that detail, even
speculation about the revenue impact of the proposal is
difficult.
A substantial percentage of the value of minerals
mined in the United States is derived from mines on private
lands. A severance taix on minerals extracted from public
lands only would fail to capture a significant portion of
the value of mineral production in the U.S. The rationale
behind a severance teix only on mineral production from
public lands is difficult to fathom. On the other hand,
mines on private land are generally already subject to
private royalties and state severance tauces . The imposition
of an additional tajc on those operations may render some of
them unprof iteible, thus potentially creating a net negative
treasury impact. In addition, a tsoc on all lands would
affect all states in which there is mining, rather than just
the western states in which hard rock minerals from public
lands are produced. 2 The potential effect of such a tax on
2 Among the states with locateible mineral production or
development targets in 1990 were: Alabama, Alaska, Arizona,
Arkansas, California, Colorado, Connecticut, Florida,
Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Maine,
Michigan, Minnesota, Missouri, Montana, Nevada, New Mexico,
New York, North Carolina, Oklahoma, Oregon, South Carolina,
South Dakota, Tennessee, Texas, Utah, Vermont, Virginia,
Washington, Wisconsin and Wyoming. With respect to mining
employment figures, we do not have detailed data on mining
employment broken down by state. We do, however, have data
provided by the U.S. Department of Interior, Bureau of
Mines, that in 1990, the total employment in metal mining
was 179,100. See Mineral Commodity Summaries 1991, U.S.
Department of Interior, Bureau of Mines, p. 4. The same
publication estimates 1990 employment in non-metallic
minerals (except fuels) and non-fuel organic minerals at a
total of 274,000. IsL. at Table 1, p. 5.
1270
states like Michigan and Minnesota, which have significant
iron ore production, Missouri, which has significant lead
production, Tennessee, which has significant zinc
production, South Carolina, which has substantial gold
production, Florida, which has significant phosphate
production. New York, which has lead and silver production,
and Virginia and Vermont, which have talc production, would
be substantial and would likely result in some mine closures
and job losses in those states.
2. Lack of Financial and Economic Analvsia
We are aware of no detailed financial or economic
analysis of the proposed severance tax. In light of the
lack of detail concerning the structure of the severance tax
(as discussed above) , such an analysis could not be
performed in any but a speculative manner. It is dangerous
to project revenues from, a mining tax without economic
analysis. For example, one might try to estimate tax
revenues from historic production estimates. That approach
assumes that production levels in the hard rock minerals
industry will remain constant independent of external
factors other than the imposition of a severance tax. It
also assumes that levels of hard rock mineral production
would remain constant despite the increased production costs
that would be associated with the imposition of a severance
tax. We know that in the metals mining industry, taxes,
fees and royalties cannot be absorbed by passing on the
costs of the severance tax to consumers. In fact, the
demand for most U.S . -produced hard rock minerals, for
excimple, gold, is almost perfectly elastic. As a result,
hard rock miners in most cases could not pass the additional
costs imposed by a severance tax on to consumers, and would
have to otherwise cover those costs by reducing
expenditures. Especially over the long-term, this would
result in a substantial negative economic impact, decrease
in production levels, and erosion of the severance tax base.
In the short-term, it is difficult to speculate as
to whether the imposition of a severance tax would cause
companies to close existing mines. Over the long-term, and
in light of the fact that increased costs cannot be absorbed
by creating higher commodity prices, the sheer magnitude of
a 12% severance tax, especially if based on gross proceeds
or gross revenues, would be such that many new projects
would no longer be economic and many producing mines would
not be replaced once they were exhausted. It is this
decrease in the investment activity of replacing existing
mines that would cause a significant reduction in
expenditures by the industry and concomitant negative
economic impacts. Those impacts include job losses as well
as reductions in expenditures. They also include lost
personal and corporate income taxes which are likely
ultimately to be greater than the increased revenues to the
federal treasury resulting from the imposition of the tax.
Congress, of course, has already learned this
lesson. The recent experience with the "luxury tax" is a
good indicator of how taxes that are not passed along to
consumers are detrimental to the industries they are applied
to and, because of the resulting negative economic impacts.
1271
are not revenue producers . In a more recent exeimple that
directly affects the mining industry, the Congressional
Budget Office estimated in its testimony of May 4, 1993
before the Subcommittee on Mineral Resources Development
that 60% of all unpatented mining claims on public lands
would be abandoned after the imposition of a new $lOO/per
claim holding fee. Jan Paul Acton Testimony, p. 14. A
recent article in the San Francisco Chronicle estimates that
between 50% and 80% of all mining claims will be abandoned.
September 1, 1993, col. A5 . As a result of high levels of
claim abandonment, the revenue impacts of the $100 holding
fee are likely to be smaller than anticipated. This very
recent experience with mining holding fees demonstrates that
the mining industry cannot simply pass on the costs.
Accordingly, Congress should be skeptical of the revenue-
raising potential of a tax resting on the errant assumption
that higher costs will not change either industry behavior
or consumer behavior.
The main point here is that it is important to
define the purpose of the severance tcuc. As a revenue
raising device, the tax may or may not serve its purpose.
Only a thorough economic analysis will demonstrate its
success or failure on that score. If the purpose of the tax
is to raise money to deposit in a fund to clean up abandoned
mines or Superfund sites (two very different problems) , the
Committee should avoid committing funds before it has
defined the problem. In Burden of Gilt, a broadside
published by the Mineral Policy Center ("MPC") on July 20,
1993, the MPC called for creation of a federal hardrock
abandoned mine cleanup fund. The MPC report was an advocacy
piece by a special interest group. It was draimatic and
insistent. It was also misleading. The MPC report asserts
that the mining industry is practically unregulated. The
report asserts that vast sums (approximately $71.5 billion)
are necessary to clean up the mess that mining has made. In
his excellent September 9, 1993 critique of the MPC report,
Steve Barringer of Holland & Hart pointed out that MPC's
cost estimates for cleanup of abandoned mine sites are not
only undocumented, but erroneously include the cost of
cleaning up Superfund sites, which have already been funded
under the Superfund laws. As Mr. Barringer points out, this
double counting drastically inflates the MPC's estimated
cost of abandoned mine cleanup operations. In conclusion,
the Committee is considering proposing a tax whose terms are
undefined, and the purpose of which is murky, at best.
The problem of abandoned mines on public lands
deserves careful study and deliberate analysis. We must
first enlist the States in building an inventory of sites
and establishing reclamation goals and priorities. Next, we
must consider private side cleanup scenarios, before we
saddle the public with a reclamation burden. For example,
we could dramatically reduce the public burden by
encouraging private remining of old abandoned sites.
Remining could generate economic activity at a profit and
still fund reclamation.
Abandoned mine reclaunation is a complex problem
with a complex solution. It is a terrible mistake to create
a new tax to fund a program we have not yet defined.
1272
3 . An Bconomic Analysis Is Critical In Estimating
the Mat Revenue Impact of the Proposal
It is impossible to predict the impact of the
proposed severance tax without applying that tax to real
numbers from existing hard rock mineral projects, estimating
changes in output resulting from the increased costs
associated with the tax, and then using those changes in
output to derive the input to the Department of Commerce's
Regional Input-Output Multiplier system ("RIMS") .
Application of the RIMS multipliers to the changes in output
allows for an estimate of the economic impact of such a tax.
To perform such an analysis on the proposed
severance tax, one would have to calculate the impacts of
that tax on a representative sample of hard rock mining
projects during a given year, extrapolate those numbers up
to determine state -wide and industry-wide impacts, and then
determine the economic impacts (in terms of job losses,
declines in revenue and reduction of economic output)
through application of the RIMS multipliers. Such an
analysis can be designed to avoid risky projections about
future trends and production performance. It can instead be
constructed using a model reflecting the U.S. mining
industry as it actually existed in a particular year. The
analysis would then look at the financial and economic
impacts of the proposed tax on the mining industry as it
actually existed in the year selected, based on actual
price, cost, and production data collected from individual
mining companies. From that "snapshot" of the industry one
would then be able to infer what the industry would look
like going forward. That method will allow for an analysis
of the impacts of the proposed tax over the longer term, and
also for a determination of which particular projects never
would have begun because they would have been rendered
uneconomic by the new tetx.
In performing that analysis, all of the guidelines
listed below should be followed:
• The analysis should use long-term, rather than
short-term, estimates in deriving the impacts of
the proposed tax. The investments in the hard rock
minerals industry are relatively long-term in
nature, with project lives averaging from 5 to 30
years. As a result, it is necessary to evaluate
the impact of the proposed tax over a time span
that corresponds to the investment horizon of the
industry.
• The analysis should utilize actual financial and
production data from U.S. mining operations.
• . The analysis should account for the regional
differentiation of the industry. For example,
Colorado does not produce a lot of hard rock
minerals these days, but the presence of national
and regional mining company headquarters makes
mining important to Colorado. Emphasizing regional
differentiation recognizes that resource
reallocation between states or regions or out of
1273
the mining industry into other industries is
unusual at best, even over the long term. That is
especially true with capital and labor resources.
Barriers to resource reallocation will be even
greater in this case, because a severance tax
affects all projects in all states. Workers
displaced in Nevada will not find mining jobs in
mines in California because miners will be
displaced everywhere.
In estimating loss of output, the analysis should
consider the reductions in expenditures and
employment beyond the impacts on operating mining
projects; e.g., exploration, development and
construction.
The analysis should consider the net effect on
treasury receipts, including:
Loss of personal income taxes related to lost
earnings ,
Loss of corporate income taxes from increased
costs and non-viable projects.
Federal administrative costs for both
administering the implementation and
collection of the tax.
4. Ngq»tiv? Tappet Likgly
As shown in the April 30, 1993 study by Coopers &
Lybrand and Morrison & Foerster, entitled "A Comparative
Analysis of Mining Fees and Royalties" {the "1993 Study") , a
poorly designed federal royalty, and presumably a federal
severance tax, can have dramatic negative effects on the
federal treasury. As shown in the 1993 Study, the 8%
royalty on gross proceeds plus the holding fees proposed in
the 1993 Bumpers Bill would likely result in a $443 million
net loss to the federal treasury. The 8% royalty plus the
holding fees proposed in the 1993 Rahall Bill would result
in a $422 million net loss to the federal treasury. (See
Table 2 of the 1993 Study) . In performing a sensitivity
analysis on the 1993 Bumpers and Rahall Bill royalties,
assuming the holding fee remains the same, the study team
concluded that if the Bumpers and Rahall royalties were
12.5%, the net loss to the federal treasury would be $527
million under the Bumpers Bill and $472 million under the
Rahall Bill. (See Table 2 of the 1993 Study). The 1993
Craig Bill proposed a 2% royalty on net income at the mouth
of the mine. Our study showed that at a 12.5% rate, the
Craig royalty plus holding fees would net the federal
treasury only $22 million.
Although the severance tax proposal is far too
vague to afford any guidance on the question of net treasury
impacts, a comparison of the net treasury impacts of the
1993 Bumpers and Rahall Bill royalties and the 1993 Craig
Bill royalty should be instructive. A federal severance tax
in the form of Nevada's net proceeds tax is likely to net
1274
the treasury more than a severance tax on gross proceeds or
gross income; however, either form of severance teuc is
likely to have significant negative effects on the mining
industry.
More importantly, our 1993 Study only analyzed the
impacts of a gross and net royalty on public lands in 12
western states. A federal severance tax on all lands,
public and private, and on minerals found in all states
would be likely to have a more draunatically negative net
treasury impact. A severance tax applicable to public lands
only may insulate all but the western states from direct
negative consequences of mine closures. A severance tax
applicable to all lands, however, would affect every state
with an active mine. Job losses and mine closures in every
state may well have an even more dramatic negative net
treasury impact than shown in our 1993 Study.
1275
Mr. Payne. Mr. Kelly.
STATEMENT OF JOHN L. KELLY, VICE PRESffiENT, PUBLIC
AFFAIRS, CLEVELAND CLIFFS, INC., ON BEHALF OF THE
AMERICAN IRON ORE ASSOCIATION
Mr. Kelly. Mr. Chairman and distinguished members of the
subcommittee, I appreciate the opportunity to appear before you. I
am John Kelly. I am vice president of public affairs, Cleveland-
CliflFs, Inc. I am also a former tax committee chairman of American
Iron Ore Association headquartered in Cleveland, which I rep-
resent here today. The association is a trade organization rep-
resenting companies that mine approximately 70 percent of the
iron ore that is produced in the United States and Canada,
I am here to convey to you in the strongest terms possible that
iron ore producers are deeply troubled that a mineral severance tax
has been proposed and moreover, upset that it would apply to iron
ore mining. We fail to see the rationale or need for such a tax and
we cannot afford this new tax burden at any percentage level.
My remaining testimony will focus on our industry profile in the
hope that your understanding of our contribution to society and our
economic challenges will be enhanced.
Essentially there are no remaining iron ore reserves of commer-
cial grade in the United States, but huge quantities of low grade
material exist in northern Michigan and Minnesota. Presently
there are nine iron ore mining operations in these two areas that
are efficiently producing more than 50 million annual tons of high
quality iron ore pellets from low grade deposits.
These operations and the related infrastructure represent several
billion dollars of fixed investment. Steel mills are the only consum-
ers of iron ore pellets and the iron ore industry is indispensable to
the survival of our basic steel industry.
The iron content of low grade ore is 36 percent or less. These de-
posits are not suitable for any commercial use. Pellets, on the other
hand, contain approximately 65 percent iron. To the extent thev re-
main competitive in cost, they are a desirable raw material for
making iron and steel products because they consistently meet de-
manding physical and chemical specifications. Due to transpor-
tation limitations and other reasons, our pellets generally do not
enter markets outside the Great Lakes steel-producing regions of
the United States and Canada.
Global conditions in the iron ore and steel industries over the
past decade have kept downward pressure on prices and have ne-
cessitated intense efforts to increase quality and decrease costs.
Yet, iron ore is being sold below cost on a spot market basis; and
integrated steel producers continue to report losses and weak earn-
ings. Under these conditions, a severance tax on U.S. iron ore min-
ing operations cannot be passed on to consumers and it cannot be
absorbed by producers without substantial negative implications.
The northern regions of Michigan and Minnesota are as sparsely
settled and are noted for persistently high unemployment. Iron ore
mining represents the predominant source of employment for a
highly skilled and highly paid work force; and it generates consid-
erable satellite employment. Negative consequences to iron ore pel-
let producers, brought about by a severance tax, can also be ex-
1276
pected to have serious implications for surrounding communities in
these two States.
Mining is uniquely risky business; yet over the past two decades,
we have invested billions of dollars in state-of-the-art pelletizing
plants and related facilities. These investments were made with
the expectation that a reliable and stable U.S. tax system would
continue to provide essential incentives to help bring an adequate
return on these long-term investments.
Our expectations were strengthened by enactment of the Min-
erals Policy Acts of 1970 and 1980, both of which support minerals
development and enhanced minerals availability as a matter of na-
tional policy. Yet our tax system has worsened over the past decade
as it pertains to basic industry, and costs of new Government man-
dates have not helped the situation.
To now be confronted with another proposed tax system change
in the form of a national severance tax, which is in conflict with
national minerals policy, is beyond our ability to understand or rec-
oncile.
It is necessary to provide tax incentives to invest in domestic
basic industries that continue to be ravaged by economic depression
and threatened by foreign dumping and subsidies.
The domestic iron ore mining and steel industries compete with
foreign suppliers that benefit from border taxes on imported prod-
ucts and tax credits on their own exports. Domestic prices of iron
ore mining and steel have languished for more than a decade and
higher costs cannot be absorbed.
While this is not the forum in which to discuss wholesale alter-
ation of the U.S. tax system, you should know that both of these
industries have advocated prompt consideration and adoption of an
equitable GATT-legal and border-adjustable tax on U.S. business
activities as a substitute for the present tax on business income.
We ask you to reject the mineral severance tax proposal so as not
to exacerbate the major shortcomings of our Nation's existing busi-
ness tax system. In doing so, you will also assist the President in
his renewed effort to stimulate the economy.
Thank you for your attention.
Mr. Payne. Thank you very much.
[The prepared statement follows:]
1277
STATEMENT
Of
AMERICAN IRON ORE ASSOCIATION
before the
SUBCOMMITTEE ON SELECT REVENUE MEASURES
COMMITTEE ON WAYS AND MEANS
September 8, 1993
PROPOSAL TO IMPOSE A SEVERANCE
TAX ON HARD ROCK MINERALS
Mr. Chairman and other distinguished members of this
Subcommittee, I appreciate this opportunity to appear before you.
My name is John Kelley, Vice President-Public Affairs, Cleveland-
Cliffs Inc. I am also former Tax Committee Chairman of American
Iron Ore Association, headquartered in Cleveland, Ohio, which I am
representing here today. The Association is a trade organization
representing companies that mine approximately 70% of the iron ore
that is produced in the United States and Canada.
My purpose in requesting to be heard is to convey to you in
the strongest terms possible that iron ore producers are deeply
troubled that a minerals severance tax has been proposed and,
moreover, upset that it would apply to iron ore mining. We fail to
see the rationale or need for such a tax; and we cannot afford this
new tax burden at any percentage level.
Because the severance tax concept is not complicated and our
resistance is grounded in the need for a strong and world
competitive domestic iron ore mining industry, my remaining
testimony will focus on our industry profile in the hope that your
understanding of our contribution to society and our economic
challenges will be enhanced.
Essentially, there are no remaining iron ore reserves of
commercial grade in the United States, but huge quantities of low
grade material exist in northern Michigan and Minnesota.
Presently, there are nine iron ore mining operations in these two
areas that are efficiently producing more than 50 million armual
tons of high quality iron ore pellets from low grade deposits.
These operations and related infrastructure represent several
billion dollars of fixed investment. Steel mills are the only
consumers of iron ore pellets, and the iron ore industry is
indispensable to the survival of the basic steel industry.
The iron content of low grade ore ranges from less than 30% to
approximately 36%. These deposits are not suitable for steel
industry consumption or any other use. Pellets, on the other hand,
contain approximately 65% iron. The transformation of low grade
iron ore into pellets is a very expensive process in the United
States because of high energy, labor and environmental costs. To
the extent they remain competitive in cost, they are a desirable
raw material for making iron and steel products because they
consistently meet demanding physical and chemical specifications.
Due to transportation limitations and various other reasons,
however, these domestically produced pellets generally do not enter
markets outside the Great Lakes steel producing regions of the
United States and Canada, except for minor movements to steel
producers in such areas as Utah and Alabama. In contrast, foreign
competition does exist for the U.S. market, notably from Brazil
which mines a very high grade ore requiring no expensive
processing.
TT i'in r\ — QA
1278
Global conditions in the iron ore and steel industries over
the past decade have kept downward pressure on prices and have
necessitated intense efforts to increase quality and decrease
costs. Yet, iron ore is being sold below cost on a spot market
basis; and integrated steel producers continue to report losses and
weak earnings. Under these conditions, a severance tax on U.S.
iron ore mining operations cannot be passed on to consumers; and it
cannot be absorbed by producers without substantial negative
consequences.
The northern regions of Michigan and Minnesota are sparsely
settled and are noted for persistently high unemployment. Iron ore
mining, which has been forced to rationalize its operations
considerably in recent years, represents the predominant source of
employment for a highly skilled and highly paid work force; and it
generates considerable satellite employment. Negative consequences
to iron ore pellet producers, brought about by the imposition of a
severance tax, can also be expected to have serious implications
for surrounding communities in these two states, because of reduced
production and the probability that some operations would have to
close.
It is generally recognized that mining is an extremely risky
business. Yet, over the past two decades we have invested billions
of dollars in state-of-the-art pelletizing plants, related
facilities, modem self -unloading lake vessels, and other
infrastructure, primarily for domestic trade. These investments
were made with the expectation that a reliable and stzJsle U.S. tax
system would continue to provide essential incentives to help bring
an adequate return on these long-term fixed investments.
Understandably, our expectations were strengthened by enactment of
the Mining and Minerals Policy Act of 1970 and the Materials and
Minerals Policy Act of 1980, both of which are in support of
minerals development and enhanced minerals availability as a matter
of national policy. Yet, our tax system has worsened over the past
decade as it pertains to basic industry, and costs of new
government mandates have not helped the situation. To now be
confronted with another proposed tax system change in the form of
a national severance tax, which could bring eibout results that are
directly in conflict with existing minerals policy as enacted by
Congress, is beyond our ability to understand or reconcile.
The bottom line is, our industry experienced an abrupt and
severe business contraction over the past decade, and our present
economic condition remains bleak. This is greatly due to unfair
trade practices by offshore competitors and competition generally
on a global scale.
To carry out our existing national policy, it is urgently
necessary to provide through our tax system incentives to invest in
domestic industries that continue to be ravaged by economic
depression and threatened by foreign dumping and subsidies. The
question today is not growth or expansion; it is tax stability and
incentives for survival of vital basic industries in this country.
The domestic iron ore mining and steel industries compete
directly in domestic markets and elsewhere with foreign suppliers
that benefit from border taxes on imported products and tax credits
on their own exports. Domestic prices of iron ore and steel have
languished for more than a decade, and higher tax costs cannot be
absorbed. We recognize that this is not the forum in which to
discuss wholesale alteration of the U.S. tax system, but we believe
you should know that both of these industries have advocated prompt
consideration and adoption of an equitable, GATT-legal, and border-
adjustable tax on U.S. business activities, as a substitute for the
present tax on business income.
The request we present to you today is to reject the minerals
severance tax proposal, so as not to exacerbate the major
shortcomings of our nations 's existing business tax system.
1279
Mr. Payne. We have been called to vote so the committee will be
in recess until 2:30.
[Brief recess.]
Mr. Payne. The committee will come to order.
We had concluded with the testimony of our fifth panel and were
preparing to ask questions of the witnesses.
Mr. Hancock will inquire.
Mr. Hancock. Thank you, Mr. Chairman. I have several ques-
tions I would like to ask just generally.
Is there a specific proposed tax on mining? If there is, I haven't
seen it. Is it in writing any place?
Mr. Alfers. I haven't seen one either, Mr. Hancock.
Mr. Hancock. It will be difficult to evaluate it until we see what
it is.
Mr. Alfers. It makes it difficult to speculate what the revenue
or economic impact might be. It is terribly important to nail down
what this proposal is to give it any kind of consideration.
Mr. Hancock. We are talking about a tax; I understand that. It
seems like that is what we talk about here most of the time. We
don't know how it would be applied. We don't know for sure what
would be subject to the tax. We don't know how it would be col-
lected.
Mr. Chairman, we might be premature in holding a hearing on
something we haven't seen. Has there been a tax revenue estimate
prepared and if so
Mr. Alfers. I have seen none.
Mr. Kelly. I don't think there has. I would think it would be ex-
tremely difficult for anyone to make a reliable estimate.
Mr. Hancock. OK I understand that prices of metals and mate-
rials are determined on the world market. It seems we think they
aren't at times.
Wouldn't any tvpe of a tax on minerals put us at an international
competitive disadvantage, right now especially?
Mr. Alfers. I think any tax becomes a cost in the final analysis
and some taxes become a bigger cost than others. A tax on the
gross value of minerals, for example, can swallow the entire mar-
gin. Consider the idealized example of the production of an ounce
of gold. In North America, the average cost of production per ounce
of gold is about $330. If the price of gold is $360, we are looking
at a $30 margin.
If one calculates the tax or even a royalty on the gross value of
that product, it more than swallows all the margins, about 140 per-
cent of the operating margin. Something like that is obviously un-
tenable. The reason for that is that the economics of mining, the
margins are very, very thin. Often a mine will try to operate some-
times at a loss for awhile, but on a margin of 80 or 90 percent. So
taxes of the magnitude that we are looking at here are wholly inap-
propriate to an industry like this.
Mr. Hancock. Well, do you have any idea of what the total num-
ber is of how many different companies do mining and oil explo-
ration?
Mr. Alfers. In mining, there must be several thousand compa-
nies that are engaged at some level in the exploration or
prospecting, development of mining.
1280
Mr Hancock. Do you have any idea of the number of people en-
^^?f ^A mining industry, the amount of employment"^
Mr Alfers. I would like to provide you a memorandum that
would lav out the distribution of those jobs. I don't have that on
the tip of my tongue.
[The information follows:]
1281
SAN FRANCISCO
LOS ANGELES
SACRAMENTO
ORANGE COUNTY
PALO ALTO
WALNUT CREEK
SEATTLE
Morrison & Foerster
ATTORNEYS AT LAW
5200 REPUBLIC PLAZA
370 17TH STREET
DENVER, COLORADO 80202-5638
TELEPHONE (303) 592-1500
TELEFACSIMILE (303)592-1510
NEW YORK
WASHINGTON, DC.
LONDON
BRUSSELS
HONG KONG
TOKYO
DIRECr DL\L NUMBER
April 14, 1994
VIA FACSIMILE
(303) 592-2265
The Honorable Mel Hancock
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth HOB
Washington, DC 20515-6348
Re : Employment in the Mining Industry
Dear Representative Hancock:
On September 8, 1993, I testified on behalf of the
Mineral Resources Alliance at hearings held by the
Subcommittee on Select Revenue Measures of the House Ways
and Means Committee. The subject of those hearings was
miscellaneous revenue measures, among which was a proposed
excise tax on the extraction of hard rock minerals. At the
hearing, you asked for information on the number of mining
entities, including the oil and gas industry, in the United
States. You also inquired as to the number of people
employed by the mining industry.
The most current complete set of government figures
on employment in the mining industry and the number of
enterprises involved in the mining industry come from 1987.1
The total number of entities engaged in mining activities
("Establishments") in 1987 was 33,617. Broken down, that
number included 1,027 establishments in the metal mining
industry; 5,775 establishments in the nonmetallic mining
1 The remainder of the information in this and the
following paragraphs comes from the charts attached hereto
as Exhibits A and B, reprinted from the U.S. Department of
Commerce, Bureau of the Census, Statistical Abstract of the
United States 1993, 694 (1993) (Exhibit A), and the U.S.
Department of Labor, Bureau of Labor Statistics, Employment
and Earnings 86 (January 1994) (Exhibit B) .
1282
industry; 3,905 establishments in the coal mining industry;
and 22,910 establishments in the oil and gas extraction
industry.
In terms of employment, in 1987 there were 698,000
people directly employed by the mining industry. Of those,
the metal mining industry employed 44,000; nonmetallic
mining employed 113,000; the coal industry employed 163,000;
and the oil and gas extraction industry employed 378,000.
For November of 1993, that overall employment figure dropped
from 698,000 to 598,000. In November of 1993, the metal
mining industry employed 50,600 people; nonmetallic mining
employed 101,400; the coal industry employed 94,600; and the
oil and gas extraction industry employed 351,200.
During the six-year period, only the metal mining
industry saw an increase in employment . The metal mining
industry, which includes gold, silver, copper, lead and
zinc, is the industry that mines most of the minerals that
are subject to appropriation under the 1872 Mining Law and
which would, in turn, be subject to the proposed excise tax.
In addition, some of the minerals included in the
nonmetallic minerals category are subject to the 1872 Mining
Law and would be subject to the proposed excise tax as well.
It is also important to bear in mind that the
mining industry is extraordinarily productive in creating
indirect jobs. The mining industry creates service and
support jobs that are not reflected in the employment
figures reported above. Economists often use the Regional
Input-Output Modeling System ("RIMS") developed by the
Bureau of Economic Analysis to determine the indirect jobs
created by a particular industry in a particular state. For
the mining industry in the 12 western states (where the vast
majority of metal mining occurs) , that multiplier averages
19.3073 (in other words, a total of 19 jobs are created for
every $1,000,000 of output from the mining industry). It is
both the direct and indirect jobs that would be impacted by
the imposition of an excise tax.
By way of illustration, in 1993, we, along with
Coopers & Lybrand, conducted a study on the financial and
economic impacts of various royalty proposals on the hard
rock mining industry. 2 The results of that study highlight
2 Alfers & Graff, A Comparative Analysis of Mining Fees
and Royalties (1993) .
1283
both this job-creating aspect of the mining industry and,
conversely, the job loss threatened by the new fees,
royalties, and taxes recently imposed on or now proposed for
the mining industry. Our study indicated that the hard rock
mining industry would employ 47,000 fewer people over the
long term as a result of the imposition of an 8% gross
royalty on production. It is the possibility of impacts of
that magnitude that demands a thorough economic analysis of
proposals like the one for a 12% excise tax that was the
subject of the hearing.
If we can be of any assistance to the Subcommittee
in performing such an economic analysis, please contact me.
Thank you again for the opportunity to testify before the
Subcommittee .
Very truly yours,
SDA : j e
Enclosures
1284
EXHIBIT A
Mineral Industries
Mllfsf
I
* I
a I
C 1
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fiti
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5 a^a^S"** 8^"'* 558S8J3SS~KSS5"2
55*^« g82a?S288-8S'
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8 |S8SS2$$ Sg8& §Ssll§H§.|*H$§^^*
I r=^^*2^ !P« |P|B!PIP'-^^
I pSsilH ||S5 |||p|||8g||Sg
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5 82a'S""2 g;-" 5g5|85?8S*'S8?8«'"
I r««8'^|5 |s.5| ipiig|«si-Hr
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I lll^ilHS ||Si |p||S|ri|?r8
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1285
EXHIBIT B
ESTABUSHMENT DATA
EMPLOYMENT
NOT SEASONALLY ADJUSTED
B-2. EmptoyM* on norrtarm payroll* by dotailed Industry
Pixxluetlon wof1<ef»'
343^
172.5
165.2
524.8
26.5
518.1
1,101.8
539.2
27.3
535.3
351.2
163.9
181.9
.09i0
538.3
27.3
2,675.6
604.9
151.5
502.0
^»e4.6
637.8
166.2
524.1
443.5
18Z0
220.6
676.9
76.8
176.6
141.2
22J
27.3
42.6
59.5
43.3
80.8
479.8
27Z4
121.8
67.5
20.6
28.3
249.6
103.2
69.2
2Z9
504.C
2,934.9
630.5
178.3
525.2
434.2
180.9
218.1
176.4
140.5
33.8
249.5
103.6
3,523
759.1
2,142.1 :
443.0
1316
387.8
559.9
64.6
153.1
122.2
29.2
731.3
344.4
iai
374.8
23Z0
80.3
147.5
^360.6
470.6
157.7
407.3
382.2
137.4
179.2
65.6
153.7
122.6
229.6
105.2
73.8
462.3
149.3
408.0
372.4
573.5
63.5
153.1
121.9
29.5
200.3
80.8
55.6
385.3
230.6
105.8
SeefoOnotm
1286
Mr. Hancock. Would you say the severance tax would force some
mines to close or do you think that the marketplace would be able
to absorb the severance tax they are talking about?
Mr, Alfers. Some mines would close and others would change
their shape in a way that would be similar to closing. What we
have not done though is looked at the economics of a tax proposal,
because we haven't seen that. We have, however, in the context of
the reform looked pretty hard at the economics of mining projects
in the United States, and we have looked at royalties in that con-
text. We are able to on a project-by-project basis look at the way
royalty schemes affect the operations, and some mines close.
It is important here because mining is one of those industries
where there is a tremendous capital investment to build a mine.
Costs can be sunk. So to just think about the closure of a mine in
the short run grossly understates the economic impact.
It is the mines over a longer term, those mines that are on the
table if you will, those in the midst of feasibility that are approach-
ing a construction decision where the capital is not sunk, those will
stop, and in our economic analysis that is where we saw the big
jobs impact.
Mr. Hancock. On August 6, I think it was, we passed a major
tax increase. I am sure you are associated with small business com-
panies. What kind of feedback are you getting from them now
about these changes? Are you getting the same feedback from your
members as I am getting in my district about the new tax law?
Mr. Campbell. I can't comment for small business, but as a large
corporation, our tax rate has gone up and certainly the overall fact,
both from a corporate standpoint as well as personal, there is a tre-
mendous outcry at least to the people I am in contact with as far
as the new tax law is concerned.
Mr. Hancock. But you do business with a lot of small business
people?
Mr. Campbell. Absolutely, yes.
Mr. Hancock. What are those people telling you?
Mr. Campbell. Congressman, I haven't found any support. No-
body is pleased with it.
Mr. Hancock. Thank you very much.
Mr. Payne. Mr. Hoagland.
Mr. Hoagland. No questions.
Mr. Payne. Mr. McCrery.
Mr. McCrery. Thank you, Mr. Chairman.
Mr. Damron, is your major objection to an import fee that U.S.
manufacturers would be at a disadvantage in terms of energy
costs? Is that your basic objection?
Mr. Damron. That is basically it, competitiveness worldwide.
Mr. McCrery. That is a legitimate point.
Mr. Campbell and Ms. Lazenby, how do you answer that objec-
tion?
Ms. Lazenby. If you look at Japan they have an 85 percent cus-
tom fee for imported oil. We are not asking for a very large
amount. EC imposes a customs fee so I don't think the amount is
such that it would make the chemicals noncompetitive. We are ask-
ing for something that protects American jobs. We are getting
1287
$14.50 for our oil that we sell and it costs $12 a barrel to operate
that oil. We have to pay royalty.
So right now, we are losing almost $2 a barrel on the oil that
we produce. We can't survive, and you are going to lose 12 million
barrels of oil, certainly at least a million, and that is $7 bilHon
more. Surely we can come up with something that will protect
100,000 jobs.
Mr. McCrery. Mr. Campbell.
Mr. Campbell. Congressman, I think there are a couple of over-
riding issues. First, it really is in the best interest of this country,
I think, to have a strong exploration and production industry and
refining and marketing industry. I reallv believe that. Second,
there is a difference between the crude oil import fee and the re-
fined product fee that I was talking about.
In the case of the crude oil fee, the world is awash in crude oil.
It is today and if you look at conservation, alternative fuels, refor-
mulated gasoline and oxygenates, the world will be awash in crude
oil for a long time.
Any import fee that you put on crude oil increases the cost of en-
ergy in this country. We can talk about the amount, but that is the
impact. In the case of the refined product fee, there is a big dif-
ference. When the Congress passed the regulatory laws that we are
living with today, you already raised the cost to manufacture a
product in this country.
You have created that high cost product island versus the rest
of the world. We are talking about the ability of foreign manufac-
turers to undercut that because they aren't playing by the same
rules. So the higher cost product has already been created by the
regulations and laws recently passed.
Mr. McCrery. I don't disagree with that, but that is not nec-
essarily a reason to exacerbate the problem. I mean, I share Mr.
Damron's concern and I am from Louisiana, so I certainly share
the concern of the independent producers.
We have already lost somewhere between 450,000 and 600,000
jobs depending on whose estimates you believe, so another 100,000
may not seem too critical. But certainly those of us in the energy
producing states would like to preserve what we have left and even
create more. The way to do that obviously is to get the price up.
So I am kind of stuck between the concerns of our manufacturing
sector and the concerns of the producing sector. What about an im-
port fee tied to a peg price, put on a sliding scale, so that if the
world price drops below the peg price, the import fee would kick
in? Let's say we establish a peg price of $21 a barrel. If the world
price is $17, there is a $4 import fee. Have you considered that?
It seems to me that may encourage OPEC and other producers
to limit their production to meet our peg price, giving some added
incentive to get the price up to our peg price. What do you think
about that?
Mr. Damron. a floor price still gives you an oil import fee if the
world oil price is below the floor price. So that still means that the
chemical industry is less competitive in world markets under that
circumstance.
Mr. McCrery. That is true. If the world price were below the peg
price and we had an import fee, you are right; it would increase
1288
your cost vis-a-vis your competitors. But if that peg price gave the
rest of the world's producers the incentive to cut production to meet
our peg price, then you wouldn't be at a disadvantage.
Ms. Lazenby. My comment is that the independent producers
would welcome such an initiative. But I understand the concerns
that the chemical industry and I am sure the refining industry
might have. I would like to say that as independent producers and
U.S. independent producers and business people we, like the refin-
ers and the chemical people, are paying a very high environmental
cost which we are happy to pay.
We are responsible operators, and we would like to work together
with this committee and our sister industries to try to come up
with some method that keeps our refining, our chemical and our
production business alive. We may have differences in nuances, but
we ought to be able to sit down and work something out and do
it now because the time is fleeting.
Mr. Campbell. If I could make one point. I indicated to you that
the laws are increasing the cost in this country so there is no need
to exacerbate that. We are not in a equilibrium state. We have just
begun to make the investments as far as the Clean Air Act and
other regfulations are concerned, so it is not a state of equilibrium.
An important point is that rather than make these investments,
in many cases, we are shutting down plants. I just shut down the
fuel section of our Tulsa refinery. We laid off the people in that re-
finery that has been around for almost 100 years; because you can't
invest $150 million in that refinery. As we continue to move for-
ward with reformulated gasoline one in 1995, reformulated two in
1998, there will be more and more of those plants shut down.
As long as you can take the industry and go offshore and produce
the product and pollute there and bring it back in under today's
costs in this country, you have to recognize that you are going to
shut down the refining industry in this country. I do consider that
a national security issue, and I will tell you the reason why. When
we are talking about importing crude oil, you are talking probably
between 12 and 15 countries out there and the threat has always
been the formation of a cartel and consequently their dictating
prices to you.
In the case of product, you have very few foreign manufacturers
overseas. You don't have 12 to 15. Consequently, once we shut
down refineries, there is no starting them back up again. If you ex-
port that business, you will become dependent upon relatively few
foreign manufacturers to put that product into this country.
By the way, if you recall, I was only talking about gasoline and
blending components, not distillate and heating oils, and petro-
chemicals and residuals, et cetera. You primarily hear about gaso-
line and gasoline blending components only. You say don't exacer-
bate the problem. But as each year goes forward, it will get much
worse.
Mr. McCrery. I was referring to other manufacturing sectors of
the economy, not yours.
Mr. Damron.
Mr. Damron. Congressman, let me make a few comments here.
We are in support of the refining industry. We are dependent on
1289
the refining industry, so we would like to see the domestic refining
industry do well because they supply our raw materials.
Two, the concern about environmental regulation they have also
applies to other people that have to comply with environmental
regulations also and compete with foreign competitors that do not
have to comply with those same type of regulations.
Three, if you want a differential between the crude price and the
refined petroleum products, the only way I can see you can main-
tain the differential is put some kind of a ceiling on crude oil. We
are not proposing a ceiling, but it seems that would be necessary
in order to maintain a differential.
Mr. McCrery. Thank you very much.
Thank you, Mr. Chairman for your indulgence. This country
faces a problem with respect to its energy needs and its domestic
energy producing and manufacturing sectors, and it is something
this committee ought to be concerned about.
Thank you all for your testimony.
Mr. Payne. Mr. Camp.
Mr. Camp. Thank you, Mr. Chairman. I will direct my questions
to Mr. Alfers or Mr. Kelly, whoever can answer them.
Regarding the severance tax on hard rock minerals, what would
that include and can you tell me what "hard rock minerals" means?
Mr. Kelly. Let me say that I was very surprised when the an-
nouncement came out about the proposal for the severance tax and
the first persons that I called, because I didn't think there was a
Tax Code definition, was our geologist and R&D people, and they
weren't sure, and had a, apparently a glossary of terms used in the
mining industry, and the response was that any mineral that has
to be blasted as a part of its mining extraction process is a hard
rock mineral, and consequently iron ore is about as hard a rock
substance as you can get.
And it was at that point that I concluded that we had to take
this matter seriously. In trying to find out more about the genesis
of this proposal, we ran into, you might say, a blind alley. We could
not trace it back, and even today, we were attempting to try to find
out if iron ore was, let's say, originally intended to be part of this
severance tax, and we have not been able to get a conclusive an-
swer as of this moment.
Mr. Camp. Mr. Chairman, do we have before the committee any
revenue estimates for this particular proposal, any background on
how this information or calculation might be made?
Mr. Payne. We do not have any such revenue estimate.
Mr. Camp. Do we know if there are any studies that have been
submitted to the committee on this proposal?
Mr. Payne. Not at this time.
Mr. Camp. Thank you very much. Just as an aside, Mr. Camp-
bell, your company used to have a regional headquarters in my
hometown and it was a very welcome corporate citizen. I think one
of the reasons it is not there anymore is outlined in your testimony.
It was good to have you here and I appreciate your comments.
Mr. Campbell. Thank you very much.
Mr. Payne. I have a couple of questions just to further my under-
standing concerning, first, the import fee. Ms. Lazenby, you said
that right now you are losing $2 a barrel at the world price so that
1290
means there are people in the world who are able to produce oil
for $2 a barrel less than our domestic manufacturers or domestic
producers are producing oil and are still, I assume, making a prof-
it?
Ms. Lazenby. That is correct.
Mr. Payne. In order to sell at today's world price?
Ms. Lazenby. That is correct.
Mr. Payne. Then the increased tariff being discussed here is 15
cents per barrel?
Ms. Lazenby. No, 85 cents per barrel.
Mr. Payne. So that, at least in today's market, it doesn't equate
to the differential
Ms. Lazenby. It doesn't completely cover our problem, but what
it is is an offset for some tax policies, the tax policy where we could
get a production credit, where we could raise additional funds in
order to keep our production going.
For example, if you have production and it is a declining asset
and production is going down, if you can take some cash flow that
you could get from reduced taxes. Right now we are not paying a
lot of tax because we are losing money, we don't have a positive
cash flow. The reason for this proposed import fee, there are two
reasons. One is to pay for the proposed production credit that Rep-
resentative Mike Ajidrews proposed, which would give cash flow to
producers in order to be able to reinvest that and keep the produc-
tion from falling.
The other rationale and necessity for something, and it has come
up now because of the steep drop in prices and it doesn't look like
it is going to turn around soon, is the very low price that makes
just our base production uneconomic. So there are two problems.
One is keeping base production alive with a price that is a floor
price that keeps us at least at a positive cash flow or else you are
looking at losing a million barrels a day. Yes, there are countries
and companies that can produce oil at lesser price but the question
is are we going to let that cheaper oil come in and lose 100,000 jobs
and increase our trade deficit by $7 billion? That is the ultimate
question.
Mr. Payne, What would an import tax of 85 cents a barrel on
crude oil ultimately cost the consumer per gallon of gasoline?
Ms. Lazenby. Less than 2 cents.
Mr. Payne. Mr. Campbell, won't there be problems associated
with an import fee relative to our GATT agreement?
Mr. Campbell. Mr. Chairman, the short answer to that is no.
Both U.S. trade laws and the GATT agreement recognize the need
for unilateral tariffs in the event that a country such as the United
States has a national security issue. I think there have been a
number of studies, the most recent completed in July of this year,
indicating the trend we are on in the national refining industry is
creating a national security issue.
That is at least part of an answer to my colleague who indicated
that — the issue I am talking about applies to U.S. manufacturing
in general to the degree that products can be produced overseas at
less cost and consequently you shut it down here. The difference
between our industry and the rest of manufacturing is the issue
1291
around national security, so it does not conflict with the GATT
agreement.
Mr. Payne. I have also one question concerning mineral re-
sources, and Mr. Alfers, you mentioned as you began your testi-
mony that you weren't sure whether this is private land or public
land and I am not sure either. I understand that there are a mil-
lion-plus hard rock mining claims now on Federal lands based on
the mining laws of 1872, and my question to you is: Do you feel
that it would be appropriate on Federal lands for those who extract
hard rock minerals to pay something in terms of a royalty or sever-
ance tax back to the taxpayers as those minerals are extracted?
Mr. Alfers. This issue of a fair return to the public has been
aired now since 1989, and the industry has come to supporting a
bill that has passed the Senate that includes both holding fees and
a royalty. Those holding fees have been introduced as part of the
budget process for the past couple of years and have had quite an
impact. Just as of September 1993, we are now able to see how the
small business operators in the mining industry have so quickly re-
sponded to just this $100 holding fee.
Many thought it would be very small and very little impact, and
there were those who would argue that taxes on an industry like
this can simply be passed on somewhere. We have learned in the
past couple of weeks that claims are dropping. We don't know ex-
actly how much. A newspaper on the West Coast reported, esti-
mated between 60 and 80 percent of the holdings of these mining
claims will be dropped.
That is important for all of us trying to project revenue impacts
and economic impacts, because a $100 fee on a claim that is
dropped yields $0, not $100. So it underscores the point that when
we impose a tax on mining on these public lands, whether it is a
holding fee or a royalty, we are dealing with an industry that can-
not pass on these burdens. They deal in a highly competitive mar-
ket especially in the case of metals. The response will be to drop
their land holdings, close or downsize mines or cut their explo-
ration projects and send them elsewhere. We are seeing evidence
of that now.
Mr. Payne. I think you mentioned that the average margin was
8 or 9 percent. Is there a differential between the private land and
public lands profit differential?
Mr. Alfers. I have not seen one that has shown up in our data.
We didn't specifically look project by project to test profit margins.
The profit margins tended to be more of a variance of the life of
the mine, the commodity and the current prices and not a fact that
they are on public lands or private lands.
Mr. Payne. But wouldn't it be true that the cost of goods would
be higher on private lands where more payments would have to be
made than on public lands?
Mr. Alfers. In some cases that may be so, where there may be
a greater burden of, say, private royalties. The fact is that a mining
project whether a public lands project or private lands project
stands many royalties because in the mining business, the royalty
is really compensation for those along the chain of title in a project
that have made contributions and led to the discovery of the de-
posit.
1292
That is so on private lands and public lands. So a prospector on
public land who discovers a project and turns that project to a
major mining company will have a royalty very much like a private
royalty. So it is not fair to see this as an unlevel playing field.
On the private side, those who contribute to the discovery of a
project are often rewarded for that, and that is also so for those
prospectors and explorers on public lands. I wouldn't expect to see
a big differential there.
It is also fair to say that a high tax in the area of, say, 12 per-
cent on the gross or high royalties would no doubt disadvantage
public lands, because that sort of burden is not common in the pri-
vate sector. Ordinarily, one does not have to negotiate for 140 per-
cent of the margins to obtain a project in the private sector. So
these royalties and these taxes would tend to drive projects some-
where else, overseas, private lands if we have them.
In this country, private lands is no refuge for the mining indus-
try. Public lands occupy nearly a third of the land area of the Unit-
ed States and in the areas where the minerals occur, it is a much
higher percentage than that — 90 percent in some western states,
95 percent in Alaska. These are all public lands, and if we effec-
tively deny access to these public lands, there is no place for that
industry to go. There is not enough private land with minerals on
them in order to fill that gap. We are seeing now the exploration
dollars going overseas and that is likely where it will go.
Mr. Payne. You said that your industry was supporting the ac-
tions of the Senate. What did the industry decide to support?
Mr. Alfers. The industry supports Senator Craig's bill which
has passed the Senate. It is a bill that has among other things a
holding fee on the holding of mining claims, a production royalty
on the production of minerals off of mining claims, an abandoned
mine land fund, some reform of the reclamation bonding, some pro-
visions to assure compliance and reclamation of all permitted
mines on public lands. But the main distinction between the ap-
proaches in the Senate and the approaches in the House are really
in this royalty.
On the Senate side, it is a royalty that is based on the net profits
from the mining. It is not exactly a net profit as some may know
it, but it is net of mining costs and then downstream processing
cost.
On the Senate side, we have a royalty based on the gross pro-
ceeds received from the sale of a finished product. There is some-
thing unfair about that gross proceeds approach. A gross proceeds
approach has no analog anywhere that I know of It is not like Fed-
eral royalties on coal; it is not like Federal royalties on gas. Those
royalties are paid at the well head in the case of oil and gas, and
they are paid at mine mouth in the case of coal.
The royalty in the House bill is on a finished product of, say,
gold. It is not like those other products. In the case of metals min-
ing, which we spent some effort to analyze these, there was a lot
of value added from the mouth of the mine to market. That is the
problem. That is why we see this arithmetic that says an 8 percent
royalty can swallow 80, 85 percent of the profit margin.
The Senate bill measures the royalty at the mine mouth. That
means profitable mines pay the royalty, less profitable mines carry
1293
a lesser burden, but they are allowed to stay open. We save the
jobs and we continue the life of the mines somewhat longer and
they can that way fund the reclamation that is already required in
the permits.
Mr. Payne. Thank you.
Mr. Hoagland.
Mr. Hoagland. Mr. Alfers, have you had a chance to review the
testimony that will be presented in the next panel by Friends of
the Earth?
Mr. Alfers. I haven't seen it. Before I walked up here, I just saw
a couple of pages of that.
Mr. Hoagland. Maybe you are unable to respond then to some
of the statements in the second section of their testimony, impose
a severance tax on hard rock minerals. I will read the initial para-
graph.
"Hard rock mining has come under increasing scrutiny for its
legacy in environmental and social damage. The Mineral Policy
Center recently documented the vast environmental damage caused
by more than a half million abandoned hard rock mines in its re-
port, "Burden of Guilt." Left behind aft;er mining companies pull
out of mines are wastes containing highly toxic substances such as
arsenic, asbestos, cyanide and mercury. These wastes contaminate
nearby air, land, water and underground aquifers." And then it
continues to study data collected by the World Resources Institute.
And their concern sounds like the huge piles of tailings that are
left behind untended. And that it would — ^to clean up and restore
areas surrounding mines requires billions of dollars, between $32
and $71 billion they estimate here.
Mr. Alfers. I will try to respond to that. I haven't had a chance
to review it carefully. First, it is important to draw a distinction
between the reclamation of mines from the past and the reclama-
tion of mines now. I thought I heard you using the present tense
there.
Mines permitted today require reclamation, so it is a mistake to
try to impose too harsh a burden on those who are doing the envi-
ronmental job to pay for something in the past. Mining companies
reclaim today. Did they always reclaim? No; no more than manu-
facturers or anybody else who operated before the word environ-
mental even found its way into our lexicon.
We have a problem here with abandoned mines from the past
and there are lots of solutions. I rather think that the numbers
that we see from the Mineral Policy Center are a little overblown.
But whether they are or not, what is important is not to get the
cart before the horse.
We should figure out what the problem is and how to solve it be-
fore we try to fund it. A number of ways to solve these abandoned
mine problems is to encourage the remining of these projects, for
example. If they are remined and permitted, they will be reclaimed,
and we are seeing examples of that now around the West. So I
think we should all take a look at this problem.
The Senate bill which industry supports provides for an mind
land reclamation fund, an abandoned mine fund, and we would like
to see this problem solved, but we should get our arms around the
magnitude of it before we try to fund it.
1294
Mr. Kelly. Could I have a quick response from an iron ore per-
spective? I would say that the lady that you are referring to from
what you have read has to be exaggerating. It sounds like there is
a Love Canal in every county in the United States, and I think this
has to be an exaggeration.
I also want to say that iron ore happens to be, and that is what
I represent here, an inert waste problem, and is not of any con-
sequence whatsoever. I agree with Mr. Alfers on the reclamation
requirements, but I would also and moreover say that we have a
Superfund law and we have state laws such as in Michigan — it is
the 307 sites — and these are mines that have previously been
closed.
And there is a tremendous effort being done to find the respon-
sible parties, and through the Superfund law, they are being
cleaned up, we think not at quite the rate they should be, but 1
think that is a deficiency in the Superfund law, which is of course
not our subject here today.
Ms. Lazenby. May I make one more comment? I would like to
say that I understand the administration is considering a floor
price, which would take care of or help alleviate this up and down
ride on crude prices and that the small import fee would be in com-
bination with a floor price and the small import fee would be used
to offset the tax policy such as Congressman Andrews proposes to
stimulate domestic production. We need a combination, but we
need something to keep the bottom from falling out from under-
neath us.
Mr. Payne. Thank you. I thank the panel. It has been interesting
for the subcommittee. We appreciate your time, especially waiting
while we went to vote.
Thank you.
Mr. HOAGLAND. Good afternoon, everyone. We now have before
us panel 6, and the first witness that we are to hear from is Dawn
Erlandson from Friends of the Earth. Ms. Erlandson.
STATEMENT OF DAWN ERLANDSON, DIRECTOR OF TAX
POLICY, FRIENDS OF THE EARTH
Ms. Erlandson. Thank you. Mr. Chairman and members of the
committee, good afternoon. I am Dawn Erlandson, director of tax
policy for Friends of the Earth. Friends of the Earth is a global en-
vironmental advocacy group with affiliates in 50 other countries.
Thank you for the opportunity to appear before the committee
today on behalf of Friends of the Earth to express our support for
three of the miscellaneous revenue proposals before you.
They include expansion of the tax on ozone depleting chemicals,
a severance tax on hard rock minerals, and disallowance of deduc-
tions for environmental malfeasance. These proposals represent op-
portunities not only to raise revenues for the Federal Treasury, but
also to further environmental protection. The tax on ozone deplet-
ing chemicals is one of the most powerful tools that Congress has
created to protect the ozone layer. Unfortunately all chemicals that
deplete the ozone layer are not taxed.
Accordingly, we urge the committee to cover those chemicals.
They include methyl bromide, hydrochlorofluorocarbons or HCFCs,
and hydrobromofluorocarbons or HBFCs. Methyl bromide is a wide-
1295
ly used fumigant pesticide that not only depletes the ozone layer,
but is extremely toxic. Methyl bromide is currently responsible for
5 to 10 percent of ozone depletion and if emissions continue to in-
crease, it will be responsible for 15 percent of ozone depletion by
2000.
Industry is marketing HCFCs as bridge chemicals between CFCs
and ozone safe alternatives, yet some HCFCs are as damaging as
methyl chloroform, which is already taxed. Further scientific re-
search conducted by NOAA shows that HCFCs are more damaging
to the ozone layer than previously thought. Industry is developing
HBFCs to replace firefighting chemicals known as halons, yet
ozone safe alternatives to nalons exist.
It is important to note that Congress has previously taxed all
chemicals controlled by the Montreal protocol. In addition, all
chemicals categorized as class one substances under the Clean Air
Act are taxed. Since the committee last amended this tax, the par-
ties to the Montreal protocol met in November 1992 in Copenhagen
and listed all three chemicals as controlled substances.
In addition, they proposed phasing out HBFCs by 1996, freezing
consumption of methyl bromide at 1991 levels in 1995, and requir-
ing industrialized countries to cap HCFC use in 1996 and phase it
out by 2030. In February EPA proposed listing methyl bromide and
HBFCs as class one substances under the Clean Air Act and accel-
erating the HCFC phase out schedule. They also proposed freezing
production of methyl bromide at 1991 levels by 1994 and phasing
it out by 2000, as well as phasing HBFCs out by 1996.
More than a half million abandoned hard rock mines have con-
taminated the air, land and water of nearby communities. Hard
rock mining produces massive quantities of waste and a trail of
toxics, including arsenic, cyanide, asbestos and mercury. Given the
legacy of environmental degradation associated with hard rock
mining, we urge the committee to adopt a broad-based severance
tax on hard rock minerals as both a means to compensate tax-
payers in affected communities for the value of the resource ex-
tracted and for the waste and pollution left behind, as well as a
funding mechanism for cleanup and reclamation.
Estimates of the costs of reclamation range from $20 to $70 bil-
lion. Of course, any severance tax adopted should complement cur-
rent efforts to reform the 1872 mining law. Yet as the focus of min-
ing reform law is on public lands, 85 percent of hard rock mining
occurs on non-Federal lands. Clearly then a broad severance on all
extraction rather than on extraction from Federal lands only would
raise the most revenue.
Finally, when the Exxon Valdez ran aground off the coast of
Alaska, we were horrified at the devastation that resulted. Some-
what relieved, we learned that Exxon would have to pay over $1
billion to the Government for the disaster. What few of us know is
that that $1 billion was tax deductible and that Exxon was able to
reduce its tax bill and therefore shift $250 million or one-fourth of
the settlement cost to America's other taxpayers. Outrageous but
perfectly legal.
Under current law, companies that pollute the environment,
whether by illegally dumping toxic wastes or spilling oil, can de-
duct the associated, costs as ordinary and necessary business ex-
1296
penses. What are not ordinary and necessary business expenses
under current law include illegal bribes and kickbacks, net gam-
bling losses and lavish meal or beverage expenses. Even this com-
mittee and this Congress have found it appropriate to limit the de-
ductibility of certain business expenses associated with behavior
that is clearly less deplorable thsm many environmental crimes. In-
deed, the budget bill just adopted eliminated business deductions
for lobbying and for executive pay over $1 million.
The code then denies business deductions for normative reasons
in order to engender policies of less than critical concern, yet there
are no such limitations on illegal environmental pollution and deg-
radation. It is time that the Federal tax law reflect the fact that
polluting this Nation is not an ordinary and necessary business ex-
pense. We urge you to adopt legislation proposed by Congressman
Gerry Studds, H.R. 2441, and eliminate the ability of companies
that pollute the environment to pass on their costs to other tax-
payers. Thank you.
Mr. HOAGLAND. Thank you, Ms. Erlandson.
[The prepared statement follows:]
1297
Statement of
Dawn Eriandson
Director of Tax Policy
Friends of the Earth
On Behalf of
Friends of the Earth
Hoarding
Miscellaneous Revenue-raising Proposals
Before the
Subcommittee on Select Revenue Measures
Committee on Ways and Means
United States House of Representatives
September 8, 1993
INTRODUCTION
MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE, I am Dawn
Eriandson, Director of Tax Policy for Friends of the Earth (FoE). Friends of the Earth •
is a global environmental advocacy organization with affiliates in 50 other countries.
Mr. Chairman, I thank you for the opportuiuty to appear before the Committee
on behalf of Friends of the Earth to express our strong support for three of the
miscellaneous revenue proposals before you today. These proposals represent
opportunities not only to raise revenues for the Federal Treasury but also to further
environmental protection. We urge the Committee to embrace these environmentally
sound tax proposals as it has similar proposals in the past ,
STRENGTHEN THE TAX ON OZONE-DEPLETING CHEMICALS
The tax on ozone-depleting chemicals is one of the most powerful tools Congress
has created to protect the ozone layer. This economic instrument has successfully
encouraged industry to adopt alternatives to CFCs and increase CFC recycling. In the
short period since the tax took effea in 1990, U.S. CFC production has dropped
significantly, well below the limit allowed by the Monueal Protocol, the international
ozone protection agreement.
Unfortunately, all chemicals that deplete the ozone layer are not taxed.
Accordingly, we urge the Committee to extend the current tax on ozone-depleting
chemical?, to three additional kinds of chemicals that harm the ozone laver and threaten
human and ecological health. These chemicals are methyl bromide,
hydrochlorofluorocarbons or HCFCs, and hydrobromofluorocarbons or HBFCs.
1298
We propose that the Committee tax these chemicals using the same approach that exists
under current law: the tax equals the base tax rate multiplied by each chemical's ozone
depletion potential (ODP). The base rates established by the Energy Policy Act of 1992
should be used. These rates per pound are: $4.35 in 1994, $535 in 1995, $5.80 in 1996,
$6.25 in 1997, and $6.70 in 1998.
1. Tax Methyl Bromide
Methyl bromide is a widely used fumigant pesticide. It not only depletes the ozone
layer but is extremely toxic and can be lethal if mishandled. The bromine in methyl
bromide is a very effective ozone depleter. According to the United Nations Environment
Program's (UNEP) Methyl Bromide Interim Scientific Assessment of Jime 1992, methyl
bromide is currently responsible for five to ten percent of ozone depletion, and if emissions
continue to increase at current rates, it will be responsible for fifteen percent of ozone
depletion by 2000.
The Parties to the Montreal Protocol listed methyl bromide as a controlled substance
in Annex E of the November 1992 Copenhagen amendment to the protocol. The
amendment freezes industrialized country consumption of methyl bromide at 1991 levels in
1995. The Parties resolved to decide on further controls and a possible phaseout date by
no later than their seventh meeting in 1995.
On February 16, 1993, the U.S. Environmental Protection Agency aimounced a
proposal to list methyl bromide as a Class I Substance under Title VI of the Clean Air Act
Amendments of 1990. The Notice of Proposed Rulemaking proposes to freeze methyl
bromide production at 1991 levels by January 1, 1994 and phase out production by January
1, 2000.
Congress has previously taxed all chemicals controlled by the Montreal Protocol. The
tax initially covered CFCs and halons, and subsequently Congress expanded the tax to
include methyl chloroform and carbon tetrachloride. The expansion followed the June 1990
London amendment to the protocol, which added these chemicals to the list of controlled
substances. In addition, all chemicals categorized as a Class I Substance under the Clean
Air Act are subject to the excise tax.
Annex E of the Copenhagen amendment to the Montreal Protocol lists methyl
bromide's ozone depletion potential (ODP) at 0.7. Based on an estimated 1991 methyl
bromide production level of 50 million pounds per year, a methyl bromide tax would yield
$995.75 million over the 1994-1998 period. This revenue estimate, however, does not
account for conservation measures which the tax would initiate or a more stringent phaseout
schedule.
UNEP's June 1992 methyl bromide assessment indicates that significant reductions
in methyl bromide can be achieved during the 1990s by replacing the chemical with
alternatives, using recovery and recycling technology, and adopting improved practices.
EPA's policies aimed at methyl bromide will not cut methyl bromide consumption
below 1991 levels until 2000. Worsening ozone depletion requires much stronger measures.
Increasing the price of methyl bromide with a tax will create an incentive for industry to
immediately reduce consumption.
2. Tax HCFCs
Industry is marketing HCFCs as "bridge" chemicals between CFCs and ozone-friendly
alternatives. Nonetheless, HCFCs are ozone-destroying chemicals and should not be exempt
from the tax. Indeed, some HCFCs are as damaging as methyl chloroform, which is taxed.
(According to the ODPs listed in the Montreal Protocol and the Clean Air Act, HCFC-141B
and methyl chloroform have the same ODP of 0.1.)
1299
Congress recognized the environmental impact of HCFCs in the Qean Air Act
Amendments of 1990. The Act requires HCFC recycling, bans certain HCFC applications,
and phases out HCFC production between 2015 and 2030.
Parties to the Montreal Protocol listed HCFCs as controlled substances in the Annex
C of the November 1992 Copenhagen Amendment to the protocol. The Amendment
requires industrialized countries to cap HCFC use in 1996 and then reduce HCFC
consumption by 35% in 2004, 65% in 2010, 90% in 2015, 99.5% in 2020, and 100% in 2030.
On February 16, 1993, the U.S. EPA annoimced a Notice of Proposed Rulemaking
that proposes accelerating the HCFC phaseout schedules in the Qean Air Act on the basis
that such reductions are necessary to fwotect human health and the environment and that
they are technically feasible. The agency is proposing to phaseout HCFC-141B in 2003,
HCFC-22 and HCFC-142B in 2020. and aU other HCFCs in 2030. The agency beUeves
these reduction will meet the HCFC requirement of the Copenhagen amendment to the
Montreal Protocol.
Scientific research conducted at the US National Oceanic and Atmospheric
Administration (NOAA) shows that HCFCs are more damaging to the ozone layer than
previously thought. While their long-term ozone-depleting potentials (ODPs) range from
2 to 10 percent of that of CFCs, their near-term (5 to 10 years) ODPs are much higher. For
example, HCFC-22 has an ODP of 0.19 over 5 years and 0.17 over 10 years while its steady-
state ODP is only 0.05.
Ozone-safe, chemical-free alternatives and less harmful chemicals to the ozone layer,
such as HFCs, have been developed. While HCFCs and HFCs tend to contribute to cUmate
change, HFCs tend to be more expensive than HCFCs. Taxing HCFCs would encourage
industry to adopt the most environmentally sound alternatives.
Based on estimates of ODP-weighted HCFC production in the United States, an
HCFC tax would yield $753.02 million over the 1994-1998 period.
3. Tax HBFCs
HBFCs are chemicals that industry is developing to replace fire-fighting chemicals
known as halons. HBFCs have higher ODPs than HCFCs. For example. Fire Master 100
(HBFC-22B1), developed by Great Lakes Chemical to replace Halon-1301 and Halon-1211,
has an ODP of 0.7.)
Industry has developed ozone-safe alternatives to halons. For example, Ansul Fire
Protection is manufacturing a halon replacement called Inergen, which has an ODP of 0.
Parties to the Montreal Protocol listed HBFCs as controlled substances in Armex C
of the Copenhagen Amendment. Due to then- high ODPs, the Parties agreed to phase out
HBFCs by January 1, 1996, on the same schedule as CFCs.
EPA's Notice of Proposed Rulemaking proposes listing HBFCs as Class I Substances
and phasing them out by January 1, 1996.
IMPOSE A SEVERANCE TAX ON HARD ROCK MINERALS
Hardrock mining has come imder increasing scrutiny for its legacy of envirbnmeptal
and social damage. The Mineral Policy Center recently documented the vast environmental
damage caused by more than half a mUlion abandoned hardrock mines in its report, Burden
of Guilt. Left behind after mining companies pull out of mines are wastes containing highly
toxic substances such as arsenic, asbestos, cadmium, cyanide, and mercury. These wastes
contaminate nearby air, land, water and underground aquifers, thus threatening human
health as well as the economic vitality of neighboring communities.
1300
In addition to a trail of toxics, mining operations leave behind massive quantities of
waste. According to unpublished data from the World Resources Institute, much of the
excavated material from mining operations is waste. For both metals and non-metallic
minerals, overburden waste accounts for 29 percent of the total metric tons of material
mined. For metals such as phosphorus and copper, overburden wastes account for 57
percent of the total material mined. And in the case of gold, overburden waste accounts
for a whopping 78 percent of the total material excavated.
Given the legacy of environmental degradation associated with hardrock mining, we
urge the Committee to consider adoption of a broad-based severance tax on hardrock
minerals as both a means to compensate taxpayers and affected communities for the value
of the resource extracted and for the waste and pollution left behind and a funding
mechanism for cleanup and restoration. Such a tax would be levied as hardrock minerals
are removed, or "severed," from the mine. The rate of tax as proposed would be 12 percent
of the value of the removal price of the mineral.
To clean up and restore areas surrounding mines requires billions of dollars. The
Mineral Policy Center estimates that cleanup costs range from $32.7 to $71.5 billion. A
severance tax such as the one under consideration by the Committee could provide essential
resources to undertake the desperately needed cleanup. Precedence for such a dedicated
fund exists in the form of the Abandoned Mine Land Fund for restoring abandoned coal
mines. Such a fund could be financed with a reclamation fee or a severance tax.
As you know, the Committee on Natural Resources is in the process of reforming the
Mining Law of 1872 and is examining the issue of royalties. The environmental community
strongly supports reform and has endorsed reform legislation, H.R. 322. We urge the Ways
and Means Committee to work closely with the Committee on Natural Resources to adopt
a suitable reform plan that includes severance taxes.
Much of the focus of reform of the 1872 Mining Law is on the management of
hardrock mining operations on public lands. However, environmental damage caused by
hardrock mining does not occur only on federal lands. In fact, an estimated 85 percent of
hardrock mining actually occurs on non-federal lands. These lands include private, state-
owned and federal lands that have been "patented" by private companies for mining.
Clearly, the greatest revenue to be raised would come from a broad-based severance
tax on all extraction rather than on extraction from federal lands only. An ancillary benefit
of a broad severance tax would allow the federal government to collect some financial
remuneration from companies that have taken title to public land through patents. Under
current law, patenting precludes the federal government from collecting royalties from the
mining companies. Historically, mining companies have patented lands when they feared
the imposition of royalties on the minerals removed. Recently, the Bureau of Land
Management has been deluged with patent applications by miners seeking to avoid paying
the royalties which seem imminent in the proposed reform of the 1872 Mining Law.
Many states have some form of severance tax on hardrock mining. Generally, these
severance taxes apply to all mining, not just that on state-owned lands. Since many states
already impose severance taxes, it would be relatively simple to follow with a federal
severance tax. Further, the existence of both state and federal levies on cigarettes and
gasoline demonstrate that the existence of a tax at one level does not preclude the existence
of a similar tax at another level.
As it is clear that taxpayers have an interest in assuring that public lands not be
ravaged by profit-seeking mining operators and that they be duly compensated for the value
of the mineral as well as cleanup costs and environmental restoration associated with the
mining wastes, we submit that a federally-imposed severance tax be adopted in order to
further the public interest.
1301
DISALLOW DEDUCTIONS FOR ENVIRONMENTAL MALFEASANCE
In 1989, the Exxon Valdez ran aground off the coast of Alaska and spilled nearly 11
million gallons of crude oil into Prince William Sound. In 1991, Exxon reached a settlement
with the Federal Government and the State of Alaska in which it agreed to pay $1,025
billion in fines and damages to repair the vast environmental destruction to the Alaskan
shoreline. Of the $1,025 billion, only $25 million was an actual fine and, under current law,
not tax deductible. The remainder of the settlement, however, was characterized as
restitution and therefore was and is tax deductible. Indeed, $1 billion in clean-up costs,
legal fees, damages, and even the 11 million gallons of oil that devastated the Soimd were
tax deductible.
The effect of the ability of Exxon to deduct these costs from its tax bill were
dramatic. According to analyses done by the National Wildlife Federation and the Alaska
State Legislature, the value of the $1 billion in federal and state tax dedurtions to Exxon
ranged from $279 to 298 million dollars in reduced tax liability. The National Wildlife
Federation estimated that Exxon would reduce its federal tax bill by $257 million and its
Alaskan tax bill by $22 million.' As a result, Exxon successfully shifted part of its
responsibility for the devastation it wrought in Alaska to America's taxpayers, some of whom
lived in Alaska and suffered direct damage from the spill.
Last Congress, Congressman Frank Guarini recognized the outrageousness of
requiring American taxpayers to assume even part of the responsibility for a company's
negligent, even intentional, pollution of the environment. He introduced legislation, H.R.
1726, to limit tax deductions in cases of environmental malfeasance.
This Congress, Chairman Gerry Studds has offered comparable legislation, H.R. 2441.
Chairman Studds bill would disallow deductions for amounts paid pursuant to settlements
and for compensatory damages under certain environmental laws. The money saved by
eliminating this tax break would be used as an offset for tax relief for people who pay a
disproportionately high percentage of their income for sewer and water services. We urge
the Committee to adopt Chairman Stucjds legislation ^nd limit thg ability pf companies that
pollute the environment to pa.ss on their costs to other taxpayers.
Under current tax law, companies that pollute the environment, whether by spilling
oil or dumping toxic wastes illegally, are allowed to deduct all the costs associated with the
pollution as ordinary and necessary business expenses, even though the companies were
found to have broken the law.
Some would argue that these costs should continue to be deductible because the
purpose of the Code is to raise revenues and that businesses, whether good or evil, are taxed
on their net incomes. Since ill-gotten gains are taxed, some aigae, then the costs of
producing such gains should be deductible. However, under U.S. tax law, all tax deductions
were once subject to the so-called "public policy limitation," the thrust of which was to
disallow a deduction in any instance where allowing the deduction would fi-ustrate a sharply
defined government policy. Tliis "public policy limitation" remains in effect for a few
business deductions that are deemed to violate the public good including illegal bribes and
kickbacks, treble damage payments under the antitrust laws, and fines and penalties.^
^ Hearing Record, Task Force on Urgent Fiscal Issues,
Committee on the Budget, U.S. House of Representatives, "Budgetary
Implications of the Exxon Valdez Oil Spill Settlement," October 31,
1991, Washington, DC.
^ Asbjorn Eriksson, Robert Hertzog, John Tiley, David
Williams, Friedrich von Zezschwitz, Taxation for Environmental
Protection; A Multinational Legal Study, ed. Sanford E. Gaines and
Richard A. Westin (Westport, CT: Quor\im Books, 1991), pp. 187 -
189.
1302
Even this Committee and this Congress have found it appropriate to limit the
deductibility of certain business expenses associated with behavior that is clearly less
deplorable than oil spills or dumping of toxic wastes. Indeed, the budget bill that the
Congress just passed eliminated the business deductions for lobbying expenses and executive
pay over $1 million. It further limited the deduction for business meals and entertaimnent
expenses to 50 percent, thereby complementing current law which denies all deductions for
meal or beverage expenses that are lavish or extravagant.
The Code, then, denies business deductions for normative reasons in order to
engender policies of less than critical concern, yet there are no such limitations on producers
of environmental pollution and waste. No justifiable reason can explain why we deny
business deductions for high executive pay and lobbying expenses while allowing deductions
for expenses related to illegal environmental devastation. Failing to bar taxpayers from
claiming deductions for environmentally destructive business behavior amounts to a tax
subsidy for prima facie illegitimate behavior.'
The Studds bill sends the right messages to corporate polluters. Continuing to allow
income tax deductions for violations of environmental laws seriously undermines the
deterrent effect of the environmental laws. In many cases, it may be cheaper for a company
to risk a violation than to invest in prevention. Thus, denying deductions for environmental
cleanup expenses would provide a significant incentive for companies to comply with this
nation's environmental laws, and to safeguard against negligence. Contrary to industry
arguments, denying deductions would not frustrate expenditures for enviroimiental cleanup
because, under law, the companies must clean up. TTiere is no need to provide incentives
to obey the law. It is time the federal tax code reflected the fact that polluting this nation
is not an ordinary and necessary business expense.
This Committee has heard in the past about the perverse effects of current U.S. tax
policy on the environment. Allowing a tax deduction for cleanups associated with
environmental crimes, at a time when honest taxpayers cannot afford adequate water and
sewage service, is the quintessential example of this perversity. Currently, we give tax breaks
to polluters, while communities cannot pay their sewer and water bills because of the high
costs of dealing with water pollution. The Studds bill addresses this incongruity. Polluters
must pay for the harms that they cause, only then will they recognize the true costs of their
actions. The American taxpayer must no longer subsidize behavior that is environmentally
irresponsible.
' Ibid.
1303
Mr. HOAGLAND. Mr. Merlis.
STATEMENT OF EDWARD A. MERLIS, SENIOR VICE PRESI-
DENT, EXTERNAL AFFAIRS, AIR TRANSPORT ASSOCIATION
OF AMERICA
Mr. Merlis, Thank you, Mr. Chairman. I appreciate the oppor-
tunity to appear before you today to discuss several revenue meas-
ures which will have a substantial impact upon the financial health
of the U.S. air carriers. I am Edward Merlis, senior vice president
of the Air Transport Association of America. ATA's 17-member car-
riers flv 96 percent of the revenue passenger miles and 97 percent
of the freight carried by U.S. flag carriers.
The airline industry is currently facing desperate financial times.
Having suffered unprecedented losses since 1990, airlines have
parked aircraft, slashed capital orders and furloughed workers.
As a result, earlier this year the Congress established a National
Airline Commission to investigate, study, and make policy rec-
ommendations about the financial health and future competitive-
ness of the U.S. airlines and aerospace industry. The commission
has now completed its report and documented industrywide losses
of $10 billion over the last 3 years.
Among the negative influences on airline industry health cited by
the commission were, "tax policies which often have had a major
and adverse effect on the industry." Although the commission con-
cluded that "tax changes alone will not restore the industry to prof-
itability," it did observe without hesitation that "we believe there
are several tax provisions that impede the ability of the industry
to return to financial health." Thus, it is with some chagrin that
the industry finds itself once again in the position of needing to ad-
dress proposed changes to the Tax Code which would adversely af-
fect the environment in which we operate, particularly in light of
the commission having identified Federal taxes totaling more than
$1.5 billion per year that need to be cut. Measures which in the
commission's words "violate reasonable principles of common sense
and good public policy."
Instead of appearing here today in support of efforts by Congress
to implement the recommendations of your commission, we are
here discussing a series of proposals which would exacerbate the fi-
nancial strains on the industry and add to the tally of jobs lost in
the airlines, aircraft, and engine manufacturers and in the travel
and tourism industry.
The first proposal I would like to address amends the Internal
Revenue Code to deny a business deduction for that portion of the
cost of an airline ticket in excess of coach fare. While the proposal
will be directed at the business traveler, the true burden will fall
upon the airline industry itself To the extent flyers switch to coach
as a result of the enactment of this proposal, the Government does
not gain any revenue and the airline industry loses much needed
revenue. Assuming all business travelers, who would otherwise
travel in business or first class switched to coach class for domestic
tickets only, the U.S. airline industry would lose $220 million per
year and would in all likelihood lay off several thousand flight
attendants.
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In actual practice we do not expect all, nor do we know which
business travelers who currently travel in business or first class
would switch to a coach seat. Some may, in fact, choose to charter
aircraft at greater cost to the Treasury and greater injury to the
airlines.
This proposal is particularly objectionable to ATA member air-
lines because it arbitrarily singles out, one, travel fi^om other busi-
ness expenses and, two, air travel fi^om other business travel. The
proposal clearly and unfairly targets the airline industry. Deduc-
tions for business expenses for other sectors of the travel industry,
such as hotels, cruise lines, trains and rental cars, are not im-
pacted bv this proposal, even though different classes of service can
be purchased in each and every one of those travel industry
services.
Why should the airline industry, which has been hemorrhaging
since the beginning of this decade, be the only travel industry com-
ponent that must bear the cost of this proposed change in deduc-
tion policy? Travel in business or first class is not undertaken on
a lark